THE UNIVERSITY 
OF ILLINOIS 
LIBRARY 


332.14 
Di45w 
cop. 3 


E 
REMOTE STORAS 


° 
i "7 
< : 
7 a 
i abe 
, a aaa 
ary i 
« 
4 ~ 
ay i \ 1 
! i" 
) 
‘ 
4 
‘ 
‘ 
xy 
; t 
J ? * 
bee Ts a 


THE WORK OF 
CORPORATE TRUST 
DEPARTMENTS 


BY 
R. G. PAGE 


VICE PRESIDENT, BANKERS TRUST COMPANY 


AND 
PAYSON G. GATES 


ASSISTANT SECRETARY, BANKERS TRUST COMPANY 


New YorK 
PRENTICE-HALL, Inc. 
1926 


PRINTED IN ’ 


PREFACE 


The tendency of modern financial institutions is toward 
specialization. ‘To-day, the typical trust company or bank in 
a financial center is a complex organization composed of a 
number of departmental groups, each busy in its own sphere 
of activities. The intensive study by each department of its 
special problems has featured the development of banking 
institutions in recent years. ‘This concentration on technical 
requirements, while in no wise lessening the desirability of 
a broad knowledge of banking, does emphasize the need and 
the value of trained specialists. 

The reading matter on the subject of the fiduciary services 
of trust companies and banks on behalf of corporations, and 
in relation to corporate securities, is somewhat limited. Sev- 
eral excellent studies of corporate trusts and certain special 
phases of corporate agency functions have been made by 
lawyers of high standing. In the standard books on banking 
practice some space has been allotted to the trust department. 
Valuable collateral reading is to be found, also, in the various 
textbooks on investments and corporation finance. But there 
is little material in printed form from which those engaged 
in this line of work can learn the viewpoint and observe the 
operating methods of others in the same field. 

The purpose of this book is to discuss the various services 
rendered by corporate trust and corporate agency depart- 
ments, and to describe the methods of a large financial insti- 
tution in this connection. In treating these subjects, emphasis 
has been laid on how things move, but the reasons why have 
not been overlooked. A study of this nature might be carried 
to much greater length. For instance, the legal questions 
which arise could be discussed authoritatively only by counsel, 
and such discussion would result in substantial expansion of the 
book. In respect of legal matters the authors have been con- 
tent, in most instances, to give quotations from the writings of 
lawyers of recognized standing and to make references and 
citations which will assist the reader to an understanding of 


[ iii | 


'S: Aas 3 iL ad 


IV 7 PREFACE 


the,point involved. The aim has been to include such material 
as will be useful to trust officers and others charged with carry- 
ing on the corporate fiduciary activities of their institutions. 
In reaching a decision as to the relative value of the various 
subjects, the authors have been guided by their own practical 
experience and by the valued suggestions of their banking asso- 
ciates and their friends in the legal profession. While written 
chiefly for those engaged in this special field, it is felt that 
enough of a background has been given to make the book 
helpful to students specializing in banking and kindred 
subjects. 

With the kind permission of ‘The Bell Telephone Company 
of Pennsylvania, one of its mortgages has been used as a basis 
for discussion in the chapters on the form of corporate 
mortgages. This mortgage, with names and dates changed, 
but substantially as executed, has been reprinted in the 
appendix. Likewise, other documents which appear through- 
out the book conform, except for minor alterations, to those 
used in actual practice. ‘The records illustrated are those of 
the Bankers Trust Company, New York. 

The authors are appreciative of the assistance derived from 
the various sources referred to in the text. Grateful acknowl- 
edgment is due to the author’s associates at the Bankers 
Trust Company who cooperated in reading and revising the 
text of many chapters, and to Mr. Roberts Walker and Mr. 
Jesse E. Waid, of Messrs. White & Case, for much valuable 
assistance in both the practical and the legal aspects of the 
subject. 


CONTENTS 


CHAPTER PAGE 


I—CorRPORATE FIDUCIARIES; ORIGIN, GROWTH, 


AND ORGANIZATION... l 


Early history; Development; Federal Reserve Act (with 
respect to fiduciary powers); Supreme Court decision; 
Departmental organization of trust company; Fiduciary 
departments; Custody; Personal trust; Corporate trust; Cor- 
porate agency departments; Reorganization; Stock transfer; 
Stock registration; Bond registration; Coupon paying; Joint 
facilities; General. 


IJ—CorporaTE Trust SERVIcEs; TRusts BASED 


ON THE CORPORATE MORTGAGE... i Be 


Definition of mortgage; Types of mortgages; Indentures 
other than mortgages; Collateral trust bonds; Equipment 
obligations; Unsecured obligations; Variations in titles; 
Individual trustees for corporate mortgages; Qualifications 
of trustees; Trustee’s duties. 


III—AccCEPTANCE OF CORPORATE TRUSTS ... a2 


Securing business; Preliminary negotiations; Investigation 
of proposed trusteeships; Qualification in states; Individual 
and corporate co-trustees; Restrictive state statutes; Con- 
flicting liens; Examination of form of mortgage; Execution 
of mortgage; Supporting papers; Examination of mortgage 
by the trustee. 


IV—CorPORATE TRusT RECORDS . . : 34 


Corporate trust records; Security transactions; Vault con- 
trol; Cash records; Miscellaneous records. 


V—TuHE CoRPORATE MORTGAGE; PREAMBLE, 


GRANTING CLAUSE, AND FoRMOF Bonp . “/5 


The typical mortgage; Parties and preamble; Form of bond; 
Granting clause; Article I; Authorized issues; Series of 
bonds; Adjustability; Execution of bonds; Trustee’s cer- 
tificate; Registration, transfer, and exchange; Exchange of 
denominations; Charges for registration and exchange; * 
Who is deemed owner; Duplicate bonds; Certificates 0% 
indebtedness; Temporary bonds and interim certificates; 
Exchange of temporary for definitive bonds; Issuance before 
recording. 


ViI—Issuz or Bonps UNDER CORPORATE MortT- 


(UN ATIIN: S Lad gah ety heer RN oO UO Heme a ube ena AG 
Trustee’s responsibility in certifying; Three principal pur- 
poses of bond issue; The initial issue; Reimbursement for 
capital expenditures; Acquisition of property; Acquisition 


wad 


Vi CONTENTS 


CHAPTER PAGE 
VI—Issue of Bonds Under Corporate Mortgages 
(continued ) Si a Able ‘oe 


of securities; Pending construction; Rehan ae for 
permanent additions and betterments; General restrictions; 
No default; Percentage of cost; Additions and betterments : 
New property; Earnings; Evidence of compliance with re- 
strictions; Resolutions; Order; Certificates; Opinion of 
counsel; Earnings statement; Balance sheet; Issuance of 
bonds against cash; Authority from public body; Receipts 
and counsel’s approval; Scope of the trustee’s examination. 


VIJ—CovENANTS OF THE MORTGAGOR ..) a) ne 


Reasons for covenants; Trustee’s interest in covenants; 
“Formal” covenants; Other covenants; As to the underlying 
bonds; Taxes assessed against bondholders; Insurance; Net 
quick assets; Covenants restricting dividends or bond issues; 
Annual financial statements; Equipment; Sales; Appraisal; 
Maintenance and renewal; Covenants to be calendared; 
Mortgagor’s breach of covenants. 


VIII—SINKING FUNDS AND REDEMPTION OF Bonps’ 114 


The sinking fund; Sinking funds vary with business of 
mortgagor; Bases for sinking funds; Operation of sinking 
funds; Acquisition of bonds; Measure of payment; Applica- 
tion of fund; Inviting tenders; Acceptance or rejection of 
tenders; Offer of bonds by mortgagor; Drawing by lot for 
redemption; Custody of acquired bonds; Accrued interest 
and expenses; Surrender of bonds in lieu of cash; Mortgages 
authorizing bonds in series; Capital expenditure alternative; 
Discussion of “Telephone” mortgage provisions; Large bond 
drawing; Rights of bondholder and company; Redemption 
notice; Affidavits of publication; Interest loss through failure 
to present bonds. 


IX—PLEDGED SECURITIES; RELEASES; SUPPLE- 


MENTALUVLORTGAGES Wonca ee 


Control of pledged securities; Possession of pledge securi- 
ties; Registration; Nominees of trustee; Directors’ shares; 
Pledge subject to other mortgages; Dividends and interest; 
Payment on account of principal; Voting pledged stock; 
Proxy limitations; Subsidiary or controlled companies; Pro- 
tection of pledged stock; Reorganization or merger; Release 
of portions of mortgaged property; Purpose of release pro- 
visions; Restrictions imposed; Conditions of release; Form 
of mortgagor’s application; Substitution of property on 
“utility” basis; Deferred payments; Eminent domain; Aban- 
donment of mortgaged property; Underlying lien; Applica- 
tion of proceeds; Release of property during receivership; 
Supplemental indentures. 


X—-DEFAULTS: AND REMEDIES (0°...) (G2 


“Events of default”; Procedure of trustee; Sale under fore- 
closure; Junior security-holders; Activities during fore- 
closure proceedings; Computation of amount due; Final 
decree and order; Final distribution; Disposition of en- 
dorsed bonds; General. 


CONTENTS vil 


CHAPTER PAGE 
XI—TuHeE Trustee Ciauses; MIscELLANEOUS 
PROVISIONS MERE anatase OC Now ioe) 5 Gea ccna NEA Bi i 


Acceptance of trust; Examining the protective clauses; 
Liability of trustee; Purpose of immunity clauses; Eco- 
nomics of situation; Customary provisions; Reliance upon 
certificate ; Interest on cash balances; Resignation or removal 
of trustee; Individual trustee; Miscellaneous provisions; 
Merger and consolidation; Evidence of ownership of bonds; 
Defeasance; Satisfaction guide; Matured coupons; Period- 
cal cremation of securities; Definitions; Supervision by 
bankers; Immunity of stockholders, etc.; ‘Testimonium; 
Signatures; Acknowledgments. 


XIT—EQUIPMENT TRUSTS; COLLATERAL TRUSTS; 


UNSECURED ISSUES Sg 165 


Equipment trusts; Philadelphia plan; Conditional sale jee 
Reasons for Philadelphia plan; Cash deposit with trustee; 
Covenants of railroad; Comparison between Philadelphia 
plan and conditional sale arrangement; Collateral trust 
indentures; Unsecured issues. 


XIII—MIscELLANEOUS TRUST FUNCTIONS .. 170 


Miscellaneous functions; Interim certificates; ‘Bagless 
shares ; Investment trusts ; American shares; French Bearer 
certificates; Foreign insurance trusts; Registrar of de- 
bentures, etc. (for identification) ; Conversions; Fiscal agent 
for municipalities, etc.; Paying agencies. 


XIV—CorRPORATE AGENCY SERVICES; REORGANIZA- 
RP ART MENT et cea en ee BEBE 


Scope of corporate agency services; Practice—large vs. 
small companies; Investigating offers of new business; Re- 
organization department; Corporate reorganization; Cor- 
porate readjustments; Capital subscriptions; Reorganiza- 
tions; Protective committees; Deposit agreement; Activities 
of depositary; Sub-depositaries; Listing of certificates of 
deposit; Registration of certificates of deposit; Mailing and 
publishing of notice; Relationship between depositary and 
committee’s secretary; Interest and other payments; Accept- 
ance of certificates of deposit of other committees; Cer- 
tification as to deposits; Summary of depositary’s functions 
prior to reorganization; Time limit for deposits. 


XV—REORGANIZATIONS (continued). Pe tas aCe 


Presentation of the plan; Dissents; Joint reorganization 
committee; Adoption of plan; Assessments; Consummation 
of reorganization; Distribution of new securities; General ; 
Termination of depositaries’ duties. 


XVI—CorpPoRATE READJUSTMENTS, CAPITAL SUB- 
SCRIPTIONS, AND REORGANIZATION DE- 
PARTMENT RECORDS ... Wena is’ 


Readjustment and reorganization Hea Cees da Capital sub- 
scriptions; Subscription warrant; Purchase certificate ; Re- 
organization department records. 


vill CONTENTS 


CHAPTER 


XVII—Stock TRANSFER DEPARTMENT... . 


Stock transfer department; Stock certificates; Appointment 
of transfer agent for corporation; Documents to be received; 
Original issues of stock; Voting trust certificates; Transfers; 
Power of substitution; Assignments; Guarantee of signa- 
tures; Classification of transfers; Individuals and partner- 
ships; Tenants; Corporations; Fiduciaries; Estate and in- 
heritance taxes; Co-transfer agencies; Transfer Depart- 
ment records; Records; Control of unissued stock certificates ; 
Stockholders’ right to inspect records; Closing of transfer 
books; Annual and special stockholders’ meetings; Divi- 
dends; Dividend orders; Dividend disbursing agent. 


XVIII—Stock REGISTRATION, BOND REGISTRATION, 


AND COUPON PAYING DEPARTMENTS 


Stock registration; Appointment; Relations with transfer 
agent; Records; Original issues; Signing and audit; Cer- 
tificates of deposit, etc.; Stop transfers and duplicate cer- 
tificates; Bond registration; Full registration; Registration 
as to principal only; Records; Coupon paying; Receipt of 
funds; Relations with corporate trust department; Federal 
tax law; Records; Audit; Payments for correspondents; 
Coupons from called bonds; Retention of canceled coupons; 
Stop payments; Return of coupon money. 


XIX—BEES Ee: : / 


Fees; Increased volume of business; Decreased expenses; 
Increased compensation; Standardization of rates; Cor- 
porate trust fees; Trustee under corporate mortgages, etc.; 
Trustee of foreign insurance companies; Trustee or registrar 
of industrial note issues; Fiscal agent under foreign govern- 
mental issues; Corporate agency fees; Transfer agent of 
stock; Registrar of stock; Dividend disbursing agent; Regis- 
trar and transfer agent of bonds; Paying agent of coupons 
or registered interest; Fiscal agent (returns to Collector 
of Internal Revenue); Reorganization department fees; 
Rates in New York City; Fee records and billing; Dis- 
bursements. 


BIBLIOGRAPHY @ sts oe Cee 


APPENDIX < DH so Meier nee 
Form of Corporate Mortgage 


APPENDIX 10. 0an oe a ena Mae 
Form of Equipment Trust (Philadelphia Plan) 


APPENDIX IIT. ; 
Form of Deposit Agreement 


APPENDIKALV 0) 5 2 Se ce ee nae 
Listing Requirements of New York Stock Exchange 


EN DEX I OL feta ee eG ea 


2172 


302 


Fig. 

Form 
Form 
Form 
Form 
Form 
Form 
Form 
Form 
Form 
Form 


Form /7. 


> 


DANNnnPWHON Se 
oo e e ° e ° 


ON 
Ps 


Form 7A. 


Form 8. 
Form 9. 


Form 9A. 


Form 10. 


Form 10A. 


Form 11. 


Form 11A. 


Form 12. 


Form 12A. 


Form 13. 


Form 13A. 
Form 13B. 
Form 13C. 


Form 14. 
Form 15. 
Form 16. 
Form 17. 
Rap cy 2. 
iets 3. 
Form 18. 
Fig. 4. 
Form 19. 
Form 20. 
Form 21. 
Form 22. 
Form 22A. 


LIST OF ILLUSTRATIONS 


Organization Chart HBF Sot 88 
Mortgage Examination Guide . . . . 
History of ‘Trust 


. History of Trust (aioptementaes sheer) 


Record of Bonds Issued 
Summary Sheet 
Exchange Sheet 


aixchange licket: 
. Exchange Record Title Sheet 


Redemption Sheet 


. Redemption ‘Ticket 


Securities Ledger 


Securities Ledger (suitable on save Beaiiey : 


Corporate Blotter 

Certification Blotter 

Certification Slip 

Vault Deposit ‘Ticket : 

Vault Deposit Posting aTaoket 

Vault Delivery Ticket 

Vault Delivery Posting Ticket 
Temporary Deposit ‘Ticket 

Delivery of Temporary Deposit Tieket 
Temporary Withdrawal Ticket 
Temporary Withdrawal Posting Ticket . 
Deposit of Temporary Withdrawal Ticket 


Deposit of Temporary Withdrawal Posting Ticket 


Memorandum of Cancellation 
Memoranda of Splits 
Property Card (Bonds) 
Property Card (Stock) 
Security Stencil (Stock) 
Security Stencil (Bonds) 
Collection Register 

Stencil Title Plate 
Customer’s Verification 

Cash Ledger 

Cash Journal : 
Memoranda Ticket . 
Memoranda Ticket (for Redempeian) 


1x 


Form 23. 
Form 24. 
Form 25. 
Form 26. 
Form 27. 
Form 28. 
Form 29. 
Form 30. 
Vigk AG) 
Form 31. 
Form 32. 
Form 33. 
Form 34. 
Form 35. 
Form 36. 
Form 37. 
Pig iG, 
Bigs 7, 
Mean Yipee 


LIST OF ILLUSTRATIONS 


Credit: Tickets’ so 30) Se ate a ea 
Charge Tickets 0) oa i aoe 


Proof) Sheet: oo) ph GP OR ere ie 
Trust Check we ae INGA OS 0 ea ee 
Documents Executed Slip.) 22 27 


Tickler Card.) 3) Se 
Pending Card © *).0¥ 5° a. ee 


Vault Index!) : POOR Se ts Oe 
Form of Coupon Bond Se oa a 
Research Sheet . . . te oe 
Personal Property Tax Rebiad Apalteoney Me 
Insurance Recordi oC. See ci, 
Declaration of Trust! 6 oo. ny A 
Nominee: Cardy iain or wie,» at NO errr 
Mortgage Satisfaction Guide ee 
Cremation Affidavit. Certificate’ .7.°.* 5 ee 
Interim Receipt . ebb io ae er 
Bankers’ Shares Garihone SE a 2 aan 
“American Shares’ Certificate: > +... 29° ee 
Certificate of Deposit. (Bonds)) 295. 4.) 2) eee 
Certificate of Deposit (Stock) 2°.) J) 
Subscription’ Warrant .-. 050) 
Purchase Certificate . . OR 
Reorganization Counter Ticket LE NS a 
Temporary ‘Receipt $2 6.20 ©) Gan 
Reorganization Record:. 7). 9). 9) 
Record: of Depositors.50). 2) AL 
Vault: Marker 00 a oe ee 
Delivery ‘Record ooo 9) a 
Requisition for Stock =...) °°" Sa oe 
Reorganization Counter. Ticket) . 95°...) 2 eee 
List “of | Depositors (60... 22h ee 
Subscription Record): 3.5.00 1" FU 25 


Common: Stock, Certificate 2) 9) 27 a ee 
Preferred Stock Certificate . . ON oo a nr 
Resolution Appointing Transfer Neent Ree: 234 


. Resolution Appointing Transfer Agent Gasthy co- 
transfer: Agent)..." Yee ie Ge 
Voting) Trust, Certificate...) (oan se 
Counter ‘Vicket (General) 207. 3° 2a 
. Counter) Ticket? (Special) vie Soh 
. ‘Temporary Counter’ ‘Ticket... 9% (129 320s. 
'Transter Record yn). SRL h Eee eo, a 


¥ Report of “Pransters 22 Vh5 ee ee se 


LIST OF ILLUSTRATIONS 


Stock Ledger . . 

Stock Ledger Trial THEORe 

Record of Balance Changes between ted vere 
Record of Original Issues ae 
Control Sheet — Unissued Con 
Stockholders’ List . 

Dividend Order 

Resolution Appointing Dividend Dicbies Agent 
Dividend Check Buse : : 
Lost Dividend Check Cerech Sheet 
Indemnity Letter 

Stock Dividend Record 


. Stock Dividend, Original Issue Record 
. Stock Dividend, Post Office Receipt 


Stop Transfer 

Resolution Appointing Bee (Stock Gueas 
Prior to Appointment) 

Registration Sheet (One Revisiracs 

Registration Sheet (Two Registrars) 

Record of Original Issue : 

Appointment of Bond Registrar 

Counter Receipt 

Registration Record ( Benen Only) ( 

Registration Record (Principal and Interest ) 

Ledger Sheet ei 

Cancellation and haere Sheet 

Report to Issuing Company 

Registered Interest List 

Registered Interest Check 

Coupon Envelope 

Return Envelope 

Check Register 

Coupon Ledger . 

Tax Deduction Ticket 

Coupon Account, Statement and Vierincaan 

Daily Advice : 

Monthly Statement Ht Recent 

Redeemed Bond Notice 

Fee Basis Sheet 

Commission Ledger 

Commission Work Sheet 

Commission Bill 

Disbursement Voucher . 

Stock Certificates Issued Sheet 


THE WORK OF CORPORATE 
TRUST DEPARTMENTS 


CHAPTER | 


CORPORATE FIDUCIARIES; ORIGIN, GROWTH, 
AND ORGANIZATION 


Early history.— The extensive development of the services 
now rendered by trust companies and other corporate fiducia- 
ries is essentially modern; yet the exercise of trust powers by 
financial institutions dates from an early period in our national 
history. In the New York Evening Post of August 6, 1822, 
The Farmers’ Fire Insurance and Loan Company (now The 
Farmers’ Loan and Trust Company) announced that, pur- 
suant to a charter granted by the legislature, the company 
was prepared “‘to receive, take, possess, and stand seized 
of any and all property that may be conveyed to them in 
TRUST, and to execute any and all such trust or trusts in their 
corporate capacity and name, in the same manner and to the 
same extent as any other trustee or trustees might or could 
lawfully do. ‘The TRUST property [continues the announce- 
ment] will be kept, as the Charter prescribes, wholly separate 
from other concerns of the Company, and cannot, in any event, 
be made liable for its losses or engagements.’* Some years 
later, in 1836, The Pennsylvania Company for Insurances on 
Lives and Granting Annuities which had been established in 
the insurance field in Philadelphia since 1812, was given power 
to add trust business to its activities. Meanwhile, the New 
York Life Insurance and Trust Company had been chartered. 
This institution has since merged with the Bank of New York 
(established 1784), under the name of Bank of New York 


& Trust Company. Other financial institutions in the eastern 


1H. W. Lanier, “A Century of Banking in New York, 1822-1922,” p. 279. 
(Courtesy of Farmers’ Loan & Trust Company to the authors.) 


1 


2 WORK OF CORPORATE TRUST DEPARTMENTS 


states dating from this early period have become trust com- 
panies or have acquired trust powers. 

It should be noted that each of these pioneers combined 
insurance with trust business, the identification of a trust 
company as a banking institution being left to later years. 
In fact, it was not until 1874 that all New York trust com- 
panies became subject to the supervision of the state banking 
department. 


Development.— For some years following the organization 
of these older trust companies, few opportunities were af- 
forded them to be of service to corporations. At first, com- 
paratively little business was carried on in the corporate form. 
However, corporations increased in size and number as the 
advantages of limited liability and more stable form of or- 
ganization became recognized. ‘The period was one of ex- 
pansion which created unprecedented demands for capital. 
The increased use of machinery and improvements in trans- 
portation methods furthered this expansion. Soon, the great 
period of railroad building gave new impetus to the develop- 
ment of corporations. ‘Taking into consideration the stage 
of our national development, these early railroads raised con- 
siderable amounts of capital. For example, in 1844, 17 years 
after its organization, the Baltimore & Ohio Railroad Com- 
pany had outstanding $7,000,000 in capital stock and $985,- 
000 in bonds.?. The New York & Erie Railroad Company 
reported, in 1852, $6,000,000 in capital stock and $14,000,- 
000 in bonded indebtedness.’ 

As the security issues of railroads and other corporations 
increased in size, the need for the service of trust companies 
in their fiduciary capacities was emphasized. Shortly after 
the close of the Civil War it became the general practice to 
appoint trust companies rather than individuals as trustees 
under corporate mortgages. In 1869 the New York Stock 
Exchange ruled that all listed stocks must be registered by 
an independent registrar acceptable to the Exchange, and 
trust companies generally were named as registrars of stocks. 
This requirement illustrates the trend toward establishing 


2 Stuart Daggett, “Railroad Reorganization,” page 1. (The proportion of 
stock to bonds is interesting. ) 
3 Stuart Daggett, “Railroad Reorganization,” page 34. 


CORPORATE FIDUCIARIES; ORIGIN, ETC. 3 


safeguards to protect investors from irregular issues of securi- 
ties, which is a primary function of the corporate trust 
and corporate agency departments of present-day trust com- 
panies. 

Of recent years corporations have become a dominant fac- 
tor in business. ‘The extensive field for corporate trust and 
agency services is indicated by the amount of the securities 
in the hands of the investing public. It has been conserva- 
tively estimated that over $115,000,000,000* of securities 
are held by the American people. ‘The fiduciary departments 
of trust companies and other financial institutions, in the 
capacity of trustee or agent, render service of one kind or 
another in connection with a large part of the securities held 
by the public. 

“Trust company” as used herein.—It might be well to 


mention at this point that it is not intended that the reader 
should apply our references to trust companies merely to those 
institutions which incorporate “trust company’ as part of 
their title. On the contrary, all companies engaged in the 
administration of trusts and corporate agencies are meant to 
be included, and, within this scope, of course, are state banks 
so engaged and such national banks as have qualified pursuant 
to the Federal Reserve Act. 


Federal Reserve Act (with respect to fiduciary powers).— 
The extension of trust powers to national banks is one of the 
changes brought about by the Federal Reserve Act of 1913. 
The wording in the original act was inadequate and some- 
what obscure and, after a decision by the Supreme Court of 
the United States, Congress enacted an amendment (approved 
September 26, 1918) which empowered the Federal Reserve 
Board to grant fiduciary powers to national banks upon proper 


4 Moody, “Manual of Investments” (1926 ed.), p. li, gives the following ap- 
proximation of securities in the hands of the American people in 1925: 

Corporation Bonds and Notes (at par value)............... $37,027,816,000 

Corporation Stocks (at market value)...........ceeeeeress 35,237,847 ,400 


$72,265,663,400 

This is exclusive of government and municipal obligations and other so- 

called public securities which, according to Moody, total another $43,000,000,000, 

making a grand total of over $115,000,000,000. It will be noted that corporation 

stocks have been figured at their approximate market value. If the par value 
had been used, the total would have been considerably higher. 


4 WORK OF CORPORATE TRUST DEPARTMENTS 


application of the latter. According to the amendment the 
Board may give national banks “when not in contravention 
of state or local law, the right to act as trustee, executor, 
administrator, registrar of stocks and bonds, guardian of es- 
tates, assignee, receiver, committee of estates of lunatics, or 
in any other fiduciary capacity in which state banks, trust 
companies, or other corporations which come into competition 
with national banks are permitted to act under the laws of 
the state in which the national bank is located.” 


Supreme Court decision.—As late as 1924, however, the 
Supreme Court of the United States was called upon to de- 
cide whether national banks might act as executors of estates 
in states whose laws permitted trust companies so to act.’ In 
rendering its decision the court emphasized the paragraph of 
the amendment reading, ‘“Whenever the laws of such state 
authorize or permit the exercise of any or all of the fore- 
going powers by state banks, trust companies, or other cor- 
porations which compete with national banks, the granting to, 
and the exercise of, such powers by national banks shall not 
be deemed to be in contravention of state or local law within 
the meaning of this Act.’”*® However, prior to this decision, 
the fiduciary activities of national banks had become iernly 
established in many states. 


Organization.—On page 5 appears a chart of the organ- 
ization of a large trust company. This is given for the 
purpose of visualizing the relation of the fiduciary depart- 
ments to the organization of the institution as a whole. 

From the chart it will be noted that the fiduciary group of 
departments is one of six major groups comprising the entire 
organization. Because the subject is foreign to this book, no 
effort has been made to subdivide the remaining five major 
groups, but it should be understood that each group may be 
composed of several related departments. ‘Their functions 
may be briefly summarized as follows: 


Banking.—This group includes loan, tellers, bookkeeping, 
credit, and development (new business) departments. 


5 Burnes National Bank v. Duncan, 265 U. S. 17. 
6 These quotations are from Section 11(k) of the Act as amended. This 
section also sets forth the conditions under which national banks may be 


granted trust powers. 


» ETC. 


ORIGIN 


9 


CORPORATE FIDUCIARIES 


Sat uolyeaysibay 
jU2w2sungsid 
puapialg 
(s426p27 
yo04s } Buid22y 
-yoog 42jsuedL 
siajsuedl 


‘uoijerjsibay pure 
ABSUeA] Y204S 


‘buijunosoy 


xe] 2WU09U} 
lipny uodnog 
‘sjuawhed 


sjuauheg 1S240]UI 

ucipeuisibay |jn2 
yediouiad 

©}, se uoljerjsiBoy 


‘uoipeasibay puog 


“sninuabw24e400 407) 


“UO1peaysiuilu py 


“HeYyD 


“SHUDUIYS, fIANDZS 


( S}!9U2}S 
Buipnou ) 
“spso0r2yy Aiplanoas (a) 
‘Sp4A0d2\yJ USED (e) 


4| NSA 
voleurad) pue uoileo 
-\jl4a UOdNOD pug Ppucg 
od1udeubouass 
22Uu2pu0ds2441045 (q) 
SpU2WIND0q 
Buijs 


“Saippoey pur 


[PABJS|JOD 
"SUOISAZAUOZD) 
‘juauiheg 9 
Uoljdwap2y puog 
sabueurxy puog 
SApIANIVS 
“OSIW 9B SMOAISI 
“S$2822]2y) fy sodoig 
‘spuny buryuis 
‘sjuamasinbay 4snaL 
Sanss| puog 
Yoaeas2y 


"S4sn4j 22400405 


‘SUOLIGIUOSQNS 
yeyides 

‘Sjuawysnipe- ay 

SUOILEZIUSHIOZyJ 


‘Suoipeziuebs02y 


‘QAYNDDXJ] Jiu 


“SdpWWO?) DAIGNIIX] 


"S$401921q JO pueog 


$U01}92}109 


‘Buida22eyyoog 
(2) ‘$224 
‘|2UUO0SA2q 


uonezuesIO—T ‘sly 


"UOILEHIDIOS 
SS2UISNG Mah) 


pue Sayejs3 


‘SISNal jeuossad 


"SD1PANDIS 
( eee 


* SoHIWIWIOD 


uauysaaul 4Sn4L 


6 WORK OF CORPORATE TRUST DEPARTMENTS 


Bond.—In many institutions the activities of a bond de- 
partment are carried on by a separate corporation usually 
known as a “‘security company,” owned by the institution itself 
or by its stockholders. The activities of this group, whether 
operated as a department of the main organization or as a 
separate corporation, relate to the purchase and sale of securi- 
ties. Its inventory or stock in trade is acquired through un- 
derwriting operations, originated by it or in which it par- 
ticipates with other underwriting houses. As in any other 
successful merchandising effort. it must sell the goods which 
it purchases and, for this purpose, maintains a selling force. 
In addition to selling its own wares, such a department is 
usually equipped to render the service of a brokerage office 
in the purchase or sale of any security for the account of 
customers, and, further, to render to customers general in- 
vestment advice. As a natural consequence of the latter 
service, the statistical department is usually grouped with the 
bond department. In many cases the bond department will 
control and manage the security investments of the institution 
of which it is a part. 


Foreign.—While, as would be implied from the name, this 
department deals in the currencies of foreign countries, its 
functions are much broader. In reality a foreign department 
is an extension to international affairs of the functions of 
the banking department and its broadest and most important 
services are rendered in the field of international commerce. 
Many of the larger financial institutions, particularly those 
of New York City, now maintain branches in one or more 
foreign countries. 


f 


Administration—Under this heading come the depart- 
ments which control the activities of the organization pertain- 
ing to personnel, coordination between departments, the super- 
vision of the various service groups, and the management of 
the banking offices and owned or leased real estate or 
buildings. 


Audit.—The audit department is independent of all other 
departments of the bank and ordinarily reports directly to the 
chief executive of the organization. As its name implies, its 
purpose is to maintain a continuing check on the accuracy of 
the records of the institution. In some of the larger institu- 


CORPORATE FIDUCIARIES; ORIGIN, ETC. 7 


tions this department is now headed by a comptroller who, in 
addition to his supervision of the functions of the auditing 
department, is charged with the control, from the standpoint 
of efficiency, of the organization as a whole and its records, 
and with supervision of the expense account. 


Management and control of banking  institutons.— 
It is the usual practice of large banking institutions to head 
each of the major groups discussed above with a senior officer 
(usually a vice president) who is responsible directly to the 
president or the chief executive officer. The chief executive 
in turn reports to the board of directors or executive com- 
mittee of the board. Ordinarily, the board of directors meets 
but once or twice a month and the by-laws of the institution 
will provide that in the interim between the meetings of the 
board of directors the management of the institution’s affairs 
shall rest with an executive committee selected from the board, 
which will have more frequent meetings, say, once or twice 
a week. While not indicated on the chart, the control of a 
banking institution, as in the case of other corporations, rests 
with the stockholders through their periodical election of the 
directors in accordance with the charter and by-laws of the 
company. 

Fiduciary group.—The chart indicates the two principal 
divisions of the fiduciary group, namely, trusts and corporate 
agencies. Trusts, in turn, are separated into three depart- 
ments—custody, personal trust, and corporate trust. Corpo- 
rate agencies are divided into two major departments— 
(a) reorganization, and (b) stock transfer and registration, 
and two smaller divisions, bond registration, and coupon 
paying. 

Custody.— This department has the custody of securities 
deposited by, or for the account of, customers and subject to 
their order. The department, in addition to the custody of 
the securities, will attend to the collection of income therefrom 
and the delivery or receipt of securities on order of the cus- 
tomer. It is the general practice of companies handling this 
type of business not to accept any responsibility for the super- 
vision of the securities from an investment viewpoint. 


Personal trust—This department administers estates, and 
testamentary and living (voluntary) trusts, guardianships, 


8 WORK OF CORPORATE TRUST DEPARTMENTS 


etc. The trust investment division, as explained in the fol- 
lowing paragraph on trust investment committee, supervises 
the investment of the funds of the various trusts in the de- 
partment. Ordinarily a separate division takes charge of the 
management and sale of real estate and makes investments 
represented by bond and mortgage on real estate. ‘The trust 
administration division is also subdivided into a group in 
charge of the administration of estates and a second group 
administering trusts. 


Trust investment committee.—In many trust companies 
doing a substantial personal trust business it has been found 
impracticable for the trust officer or officers alone to super- 
vise trust investments. ‘This has led in some cases to the ap- 
pointment of a trust investment committee whose member- 
ship ordinarily is composed of one or more directors of the 
company, one or more officers of the trust department, and 
perhaps one senior officer from each of the banking and bond 
groups. ‘The committee will meet periodically and pass on all 
questions of trust investments which are submitted by the 
trust department. It will keep a record of its proceedings, 
and its recommendations are submitted to the executive com- 
mittee for confirmation. In companies which have organized 
a trust investment committee the officers in charge of the 
trust department are required to submit to the committee for 
approval any proposed investment or reinvestment relating 
to trust funds. Further, the trust department is required, 
usually in codperation with the statistical department, to main- 
tain a continuing review of all trust investments, submitting 
the results of such review to the trust investment committee 
for recommendation. While practically all matters submitted 
to the trust investment committee will come from the per- 
sonal trust department, the.corporate trust department occa- 
sionally will have investments which need to be considered by 
the committee. 


New business solicitation.— The personal trust department 
frequently takes charge of its own new business solicitation 
and has a division organized for this purpose. ‘The solicita- 
tion of new trust business requires special training, a thorough 
knowledge of the theory, and at least a general knowledge 
of the technique, of trust administration. This division, while 


CORPORATE FIDUCIARIES; ORIGIN, ETC. 9 


under the control of the personal trust officers and reporting 
directly to them, ordinarily will codperate closely with the de- 
velopment or new business department of the bank as a whole. 
The trust solicitors often will develop “leads” for banking 
and custody accounts. Counterwise, the field men of the de- 
velopment department will uncover trust “leads.” For this 
reason, there should be close codperation between the two 
groups. 


Corporate trust.— The corporate trust department of a 
trust company has, as its principal purpose, the administra- 
tion of those functions which are imposed upon such an insti- 
tution, as trustee, by mortgages or indentures providing for 
the issue of bonds or other corporate obligations. Corporate 
mortgages, as we now know them, are a logical outgrowth of 
the development of corporations. So long as the funds 
needed by corporations could be supplied by one or a few 
lenders, mortgages to a trustee were unnecessary. As corpo- 
rate borrowings increased in amount, it became essential to 
set up machinery by which numerous lenders could participate 
in loans to corporations and receive acceptable evidence of 
the corporations’ indebtedness. The use of a trustee offered 
a satisfactory solution. ‘To secure its indebtedness a corpo- 
ration, by means of a mortgage, conveys all or a part of its 
property to the trustee, but in trust for the benefit of the 
holders of the bonds which the corporation issues thereunder 
and which the trustee, for purposes of identification, authen- 
ticates. Numerous other duties are imposed upon the trus- 
tees under corporate mortgages but these are mostly of an 
administrative nature unless the corporation defaults in its 
obligations under the mortgage. 

The department may include in its scope certain closely 
related agency services, such as the payment of bonds and 
the registration of interim receipts. Circumstances may also 
render it advantageous to charge the same department with 
the care of miscellaneous trust and agency accounts which 
have no relation to mortgage trusteeship.’ 


Corporate agency group.— Corporate agencies as distin- 
guished from corporate trusts comprehend, mainly, those fidu- 


7 For examples see Chapter XIII. 


10 WORK OF CORPORATE TRUST DEPARTMENTS 


ciary services rendered to corporations where the relationship 
of the trust company is that of agent rather than of trustee. 


Reorganization This department’s activities embrace 
services as agent for protective, reorganization or readjust- 
ment committees, or for corporations, in connection with the 
rearrangement (voluntary or involuntary) of the financial 
structure of corporations. The purpose of committees of this 
nature is to provide a means for concerted action by security 
holders. The appointment of trust companies as depositary 
for such committees became general during the great railroad 
reorganizations which followed the financial panic of 1893, 
although appointments of like nature had been made in 
previous years. 


Stock transfer.— Under this heading come the activities of 
the trust company as agent of corporations in issuing and 
recording changes in ownership of their capital stock. ‘The 
trust company in this capacity is merely an agent to perform 
duties which in earlier days were assumed by the corporations 
themselves. Due to the highly technical and specialized work 
involved, corporations in increasing numbers have appointed 
transfer agents. 


Stock registration.—As stock registrar, the trust com- 
pany’s duty is to check the issue of the stock of its principal, 
the issuing corporation, and to prevent any issue thereof 
(through negligence or fraud) in excess of the amounts 
authorized. The general use of trust companies as registrar 
to protect stockholders against unauthorized or overissues may 
be said to have been brought about by the manipulations of 
the stock of the Erie Railroad Company in the 1860’s. ‘The 
Erie “ring’’ of that day was able to produce an apparently 
unlimited supply of stock with which to flood the market 
whenever needed in its operations. As a result of this and 
the irregularities which appeared in the issuance of stock of 
other corporations the New York Stock Exchange finally ruled 
that all listed shares must be registered by an independent 
agency. 


Bond registration—As bond registrar, a trust company 
records the registration and transfer of bonds, both ‘‘full’” 


CORPORATE FIDUCIARIES; ORIGIN, ETC. 11 


registration (principal and interest) and registration ‘‘as to 
principal only.”” Usually, but not necessarily, appointments 


as bond registrar are the direct outgrowth of mortgage trus- 
teeships. 


Coupon paying.— As the name implies, the trust company 
through its coupon-paying department, acts as the agent of 
corporations and others in the payment of interest obliga- 
tions represented by coupons. 


Joint facilities.—As to the joint facilities indicated on the 
chart, it should be mentioned that each department of the 
trust and agency group may maintain its own accounting, 
collection, shipment, filing, and stenographic divisions, and, 
in some institutions, this is done. On the other hand, it is 
generally conceded to be more economical to operate these 
facilities under centralized control for the benefit of all of 
the departments of the group. 


General.—In the chapters that follow the purpose has been 
to discuss the fiduciary services usually rendered for corpora- 
tions by a typical trust company. In certain states local laws 
or practice may result in a trust department assuming other 
duties. Mention might be made of Michigan, where the 
statutes restrict the conduct of banking business by trust com- 
panies, which, however, quite generally act as receivers and 
liquidators of corporations; also of certain of the states where 
trust companies do a large business in mortgage loans. 


CHAPTER II 


CORPORATE TRUST SERVICES; TRUSTS BASED 
ON THE CORPORATE MORTGAGE 


Definition of mortgage.-—When a borrowing corporation 
conveys real property to a trustee, in trust for holders 
of the obligations to be issued, the instrument usually is called 
a “mortgage” or ‘“‘deed of trust.” ‘The word ‘mortgage,’ ” 
writes Mr. Roberts Walker,’ “is from the French: ‘mor?’ and 
‘gage, ‘dead’ and ‘pledge.’ A pledge .. . is the transfer of 
property by Hodge to Sadler, to secure to Sadler the payment 
of money loaned by him to Hodge or to secure the perform- 
ance of some other promise made by Hodge. In its origin, a 
pledge involved transfer of possession. A pledge may, how- 
ever, be made without surrendering possession,’ and, gener- 
ally speaking, this is true of the modern corporate mortgage, 
regarding which Mr. Walker continues: ‘“The name ‘mort- 
gage’... is a rank understatement. The modern form of 
document not only has the effect of a mortgage, but is also a 
collection of agreements, covenants, and ‘don'ts,’ whereof 


many have no logical relation to the familiar process of mort- 
A 99 


Paging). 6. | 

In many instances, however, the company does not mort 
gage its property to secure the payment of its bonds. It may 
pledge securities, claims, receivables, chattels, or other per- 
sonal property as collateral, or it may simply agree to observe 
certain conditions. “he instrument under which the bonds are 
issued is then given the title, ‘trust indenture,” “trust agree- 
ment,” or some similar designation. Its purpose is the same 
in all cases, that is, to evidence the contract between borrower 
and lender and to afford the security or assurances required 
by the lenders in addition to the company’s promise to pay. 


Types of mortgages.—As any corporate mortgage or simi- 
lar instrument exists solely to protect the obligations issuable 


1“The Modern Corporate Mortgage” (a lecture delivered at Princeton 
University, March 2, 1917). 


12 


TRUSTS BASED ON CORPORATE MORTGAGE 18 


thereunder, it seems appropriate to draw attention first to 
some of the more important types of corporate obligations. 
The title of a bond usually gives some indication of the secur- 
ity for the issue, although unqualified reliance on the title 
would be unwarranted. Investors are learning to judge bonds 
on their merits; they are more interested in equities than in 
bond titles, and are coming to realize the necessity for an 
examination of the exact position of each issue. 

While no reputable corporation would countenance a mis- 
leading description of its bonds or mortgages, it is customary 
to select the most attractive designation consistent with the 
status of the issue. Suppose a corporation wishes to issue 
bonds under a new mortgage which will be a third lien on its 
property. It might term the new mortgage a ‘“‘general mort- 
gage,’ or a “refunding mortgage,” or label its bonds with 
some title descriptive of one or more of the outstanding fea- 
tures of the issue; but it would not be likely to apply the title 
“third mortgage.” 

Detailed consideration of the various types of bonds and 
their purposes belongs in the study of investments? and cor- 
porate finance, but a brief outline is given below of the types 
of mortgages and bonds which are met with more frequently 
in trust department work. ‘The descriptions which follow 
relate to the characteristics of the various mortgages at the 


ttme of execution. It should be borne in mind that a mort- 
gage with a title implying a junior lien position ofttimes, 
through the retirement of prior lien obligations, becomes a 
senior lien. For example: 


Assume that in 1925 a corporation executed a general 
mortgage and issued bonds thereunder maturing in 1950; 
prior mortgages at that time consisting of a first mortgage 
securing bonds maturing in 1935; and a first and refunding 
mortgage securing bonds maturing in 1940, so that the gen- 
eral mortgage really constituted a third mortgage of the cor- 
poration. When the first mortgage bonds are paid in 1935 
the general mortgage bonds will move up to second rank, 


2 A comprehensive classification of bonds appears in Lawrence Chamberlain’s 
“Principles of Bond Investment”; also in W. E. Lagerquist’s “Investment 
Analysis,” Catalogue Description of the More Important Bonds, pp. 675-697. 


14. WORK OF CORPORATE TRUST DEPARTMENTS 


and in 1940, upon payment of the first and refunding bonds, 
the general mortgage bonds will move into first place.’ 

Some of the characteristics which, at the time of execution, 
may apply to mortgages of the types indicated, are briefly 
mentioned below. 


First mortgage.—This is the most common and simple form 
of corporate mortgage, constituting a first lien on the property 
pledged. In some cases, a first mortgage covers all property 
of the debtor corporation, and, in other cases, only specified 
property. Sometimes, when the mortgage covers all property 
of the corporation, it also provides that its lien shall attach to 
any property of the corporation thereafter acquired. Such a 
provision, usually referred to as an “‘after-acquired property 
clause,” is found in various types of mortgages, and is not 
necessarily restricted to first mortgages.* 


Second mortgage.—In past years it was usual to have sec- 
ond, third, and even fourth mortgages on property of the 
same corporation, particularly railroads, the title of the mort- 
gage indicating the relative rank of the lien which it created. 
To-day trust companies are sometimes requested to act under 
indentures, the titles of which embrace the words ‘second 
mortgage,’ but seldom under those with titles containing 
words indicating a lien junior to a second mortgage. This 
is to a considerable extent due to the current practice of giv- 
ing to bonds complicated titles which, while technically cor- 
rect, sometimes fail to emphasize the distance of the lien 
which they create from the property covered by the mortgage. 


First and refunding mortgage.-—Such a mortgage is a first 
lien on a part of the property pledged (sometimes a very small 
part), and a lien on other parts of the property subject to 
prior liens. Its lien position on the remainder of the property 


8 This illustration relies wholly on precedence in time. The mortgage might 
permit a prior lien to be created. 

4For a further discussion of the “after-acquired property clause,” see C. W. 
Gerstenberg, “Financial Organization and Management of Business,’ Chapters 
XII and XIII. | 

5 According to the White & Kemble Atlas and Digest of Railroad Mortgages 
(supplement issued in 1924), the Great Northern Railway Company mortgage, 
dated May 1, 1911, securing an issue of first and refunding mortgage bonds is 
a first direct mortgage on 2108.92 miles; a first collateral lien on 543.33 miles; 
a second direct mortgage on 4112.82 miles; a third direct mortgage on 663.09 
miles. 


TRUSTS BASED ON CORPORATE MORTGAGE 15 


is improved as the prior liens are paid off, through the re- 
funding operations provided for in the mortgage, that is, the 
retirement, at maturity, or otherwise, of prior obligations, 
through the issuance of first and refunding mortgage bonds. 


Refunding mortgage.—This title is inadequate, as it does 
not indicate in any way the rank of the lien, except by the 
inference that in due time prior liens will be removed through 
refunding operations under the refunding mortgage. 


General mortgage.-—This term, while indefinite, indicates, 
in most cases, a general lien on all or most of the property 
subject to several existing liens. 


First and collateral mortgage.—This title indicates a first 
mortgage on a part of the property of the company and an 
interest in other property through pledge with the trustee of 
stocks or bonds, frequently those of subsidiary or controlled 
companies. 


Prior lien mortgage.—This title indicates a lien prior to 
other obligations of the debtor, and, usually, although not 
necessarily, a prior lien mortgage secures the prime issue of 
the company. 


Purchase-money mortgage.’—As the term implies, such a 
mortgage is given in part payment of the purchase price of 
property. It usually constitutes a first lien on the property 
purchased, but not necessarily on all, or any other, property 
of the mortgagor. | 


Leasehold mortgage.—Such an instrument constitutes a 
lien on a leasehold interest in real estate, but not on the real 
property itself. Because title to most permanent improve- 
ments on real estate passes with title to the real estate on 
which such improvements are located, and because default | 
of the lessee under the terms of the lease creating the lease- 
hold may destroy the debtor’s title to the actual value behind 
such a mortgage, many trustees have had unsatisfactory expe- 


6 White & Kemble report that the Great Northern Railway Company general 
mortgage, dated January 1, 1921, is a first direct mortgage on 238.11 miles; a 
second direct mortgage on 2,108.92 miles; a second collateral lien subject to the 
first and refunding mortgage on 543.33 miles; a third direct mortgage on 
4,112.82 miles; and a fourth direct mortgage on 663.09 miles. 

7C. W. Gerstenberg, in “Financial Organization and Management of Busi- 
ness,” p. 207, gives an interesting chart to illustrate the process of acquiring 
property by use of a purchase-money mortgage. 


16 WORK OF CORPORATE TRUST DEPARTMENTS 


riences with this type of mortgage, although there are out- 
standing exceptions. 


Income mortgage.—A mortgage of this kind provides for 
an issue of bonds on which the interest is payable only if 
earned by the debtor. Such a mortgage usually contains a 
formula for the determination of net earnings. ‘The title of 
the mortgage seldom indicates the lien position, which is 
usually well down the scale of the mortgagor company’s in- 
debtedness. Interest may be “cumulative” and, if unpaid, 
continues as a charge against the company secured by the lien 
of the mortgage. 

There are many other titles such as “improvement, X- 
tension,” “unified,” or “‘adjustment”’ mortgage, each title giv- 
ing an indication of the purpose of the bond issue thereunder; 
but unless such titles are further amplified they give no indica- 
tion of lien position. ‘There are also numerous variations 
and combinations of these titles, such as “first lien and gen- 
eral mortgage,’ “refunding and improvement mortgage,” 
“consolidated and refunding mortgage,’ and so forth. 
These titles convey, to some extent at least, the purpose and 
nature of the issue. 


9 66 
e 


Indentures, other than mortgages.—Many issues of cor- 
porate securities are secured by lien on, or by the pledge of, 
personalty; that is, property other than real estate. Two 
typical examples of issues of this character follow. 


Collateral trust bonds’ which are secured by the pledge with 
the trustee, pursuant to the terms of the indenture providing 
for the issue, of specified collateral, usually securities. 


Equipment obligations,’ usually issued by railroads, but 
sometimes by steamship or industrial companies, and secured 
by the equipment, such as locomotives and cars, specified in 
the indenture under which they are issued. 


Unsecured obligations. — Some corporations are strong 
enough financially to borrow without giving a lien or pledg- 
ing securities. Such issues are, however, made under trust 
agreements and are classed as “unsecured.” They are gen- 


8 See Chapter XII. 
9See Chapter XII. 


TRUSTS BASED ON CORPORATE MORTGAGE 17 


erally given the title of ‘“‘note,” “debenture,” or “‘certificate 
of indebtedness.”’ 

Income and adjustment bonds are sometimes unsecured, and, 
conversely, notes and debentures occasionally are given mort- 
gage or collateral security, or they may contain a covenant that 
no subsequent mortgage will be made unless the notes or de- 
bentures are secured equally with the subsequent issue. 


Further variation in titles.—Each of the titles just dis- 
cussed, when applied to the bonds issued under the mortgage 
or indenture, usually is combined with other terms indicating 
special features of the issue. Some examples of these terms 
acer 


Sinking fund—indicating that the indenture provides for a 
fund to be’paid periodically to amortize the debt in whole or 
In part. 


Serial—indicating maturity in periodical ‘ installments. 
This should not be confused with the word “‘series.”” Many 
of the modern mortgages authorize the issue of bonds in 
series, the terms of each series, such as interest rate, sinking 
fund, maturity, and so forth, to be determined by the corpora- 
tion at the time each series is authorized. ‘The different series 
of bonds under a given mortgage are usually distinguished by 
a designating letter, such as A, B, C, and so forth. ‘“Serial’’ 
issues, however, while they may have a distinguishing letter, 
are usually issued to the entire authorized amount at the time 
of, or shortly following, the execution of the trust indenture. 
The payment of each installment as it matures, say, annually 
or semi-annually, serves as a ‘‘sinking fund.’’ Equipment ob- 
ligations are the best example of serial issues. 


Convertible—indicating that the issue gives to the holders 
thereof, on terms stated in the indenture, the option of con- 
verting the bond into another security, usually the common 
stock of the debtor company. 


10 Francis Lynde Stetson, in “Some Legal Phases*of Corporate Financing, 
Reorganization, and Regulation,” p. 6, makes this statement: “In England, accord- 
ing to Palmer [Sir Francis Palmer], the term ‘debenture’ seems to comprehend 
all serial obligations of the corporation, whether or not secured by a charge, and 
whether or not issued under a trust deed, those issued under a trust deed being 
generally styled debenture stock. In this country, the term ‘debentures’ has come 
to mean any class of serial obligations of a corporation mot secured by a specific 
lien upon property.” Py 


18 WORK OF CORPORATE TRUST DEPARTMENTS 


Participating—indicating that the issue is entitled, on 
stated terms, to receive, in addition to the specified interest, 
some share in the profits of the debtor company. 


Guaranteed—indicating that the issue bears the guaranty 
of some party other than the borrowing company. 


Joini—meaning a security issued by two or more com- 
panies. 


Gold—meaning that the bonds are payable in gold coin 
of a specified standard of weight and fineness. 


Sterling, franc, etc.—indicating the currency in which the 
issue is payable. 

For example, an issue entitled, “First and Retunding Mort- 
gage Convertible Sinking Fund 5% Gold Bonds, Series C,” 
would, by its title, imply: (1) that the bonds are secured by 
a mortgage which is a first lien on some property and which 
provides for the refunding of certain prior liens, and through 
the refunding operations an improvement of the original lien 
position; (2) that the bonds are convertible at the holder’s 
option, but on terms set forth fully in the mortgage and briefly 
in the bonds themselves, into some other issue, usually stock 
of the debtor company; (3) that the bonds are subject to a 
sinking fund, the terms of which are fully set forth in the 
mortgage, and briefly summarized in the bonds, providing 
for the amortization or partial amortization prior to maturity 
of the debt represented by the bonds; (4) that the bonds of 
this series bear interest at the rate of 5 per cent annually; (5) 
that the principal and interest of the debt represented by the 
bonds is payable in gold; and (6) that the bonds under this 
mortgage are issued in series of different terms, Series C being 
presumably the third series. 


Mortgage, etc., as used herein.—The use of the word 
‘mortgage’ technically should imply that the instrument is a 
lien on property. However, as most of what follows in re- 
spect of corporate mortgages applies with equal force to agree- 
ments providing for the issue of other kinds of corporate ob- 
ligations, it will serve our purpose to understand that, except 
where the context clearly indicates a limited use, subsequent 
references to mortgages include other similar types of agree- 
ments, and likewise references to bonds and bondholders are 


TRUSTS BASED ON CORPORATE MORTGAGE — 19 


to be understood as embracing, respectively, bonds, notes, 
debentures, or other principal obligations and the holders of 
such obligations. 

In principle a corporate mortgage is essentially the same 
as the simple mortgage of an individual on his home. In fact, 
corporations may, and frequently do, borrow money on the 
security of the familiar real estate bond and mortgage, pro- 
vided the amount required is not too large to be advanced 
from one source. But the present-day corporate mortgage 
provides a means by which a loan may be divided among a 
great many lenders through the issuance to participants in the 
loan of numerous separate bonds, all secured by a single mort- 
gage to a trustee. 


Individual trustees for corporate mortgages.— [he earlier 
mortgages were made to an individual trustee (or per- 
haps to two individual trustees); but it soon became evi- 
dent that this practice was unsatisfactory, as many times the 
individuals so named were not available when their services 
were needed, and they might die during the term of their 
trusteeship. Consequently, in recent years, it has been the 
almost invariable custom to appoint a bank or trust company 
as trustee. An individual co-trustee sometimes is joined with 
the corporate trustee, because of statutory requirements ;” 
but, except upon default, his duties are merely nominal, the 
corporate trustee being charged with the active duties. It is 
customary, where no reason exists for making a distinction, to 
refer to the corporate trustee as ‘‘the trustee.”’ 


Qualifications of trustees.— Corporate fiduciaries are nowa- 
days appointed as mortgage trustees to the practical ex- 
clusion of individual trustees, due not alone to the perma- 
nence of their corporate form, nor even to the quali- 
ties of strength and stability which we are accustomed to 
associate with financial institutions, for of equal or greater im- 
portance are the advantages which result from the appoint- 
ment of an adequately, equipped trustee whose experience 
enables it fully to understand the responsibilities, and properly 
to perform the duties involved in the trust relationship. To 
these desirable qualities, namely, permanence, strength, sta- 
bility, experience, and facilities, let us add one more—im- 
partiality. 


11 See page 23.. 


UY 


/ 
; 


|/ 


20 WORK OF CORPORATE TRUST DEPARTMENTS 


Trustee’s duties.—The paramount duty of the trustee is 
to protect the rights of the bondholders, and its actions under 
a mortgage should always be considered from the viewpoint 
of the bondholders’ interests. It is only natural that. the 
trustee should also wish to administer a trust to the satisfac- 
tion of the mortgagor. Until default the trustee has a con- 
tract with the mortgagor and should live at peace with it. 
However, in the event of a conflict between the mortgagor’s 


and the bondholders’ interests, the trustee must respect its 


duty to the bondholders. Every carefully drafted mort- 
gage will clearly define the duties and responsibilities of the 
trustee which, in later chapters, will be considered in detail. 
But it seems appropriate to point out at this time that, under 
a typical corporate mortgage, the responsibilities which the 
trustee accepts are definitely limited. Its position is well 
stated by Mr. William Lilly:” “Assume that the mortgage 
is made to a trust company. Though in form the trust com- 
pany is the mortgagee, it appears that it is mortgagee, not to 
secure a loan it has made but to secure the loans made by a 
multiplicity of people who receive the bonds of the corpora- 
tion as evidences of their rights as creditors of the corporation. 
The trust company is mortgagee for the benefit of the bond- 
holders. ‘The position it occupies in the transaction is called 
that of ‘trustee.’ It is not to be assumed, however, that its 
position exactly corresponds with that of the trustee of an 
estate left by a will who is charged with the duties of man- 
aging the estate. The trustee under a corporation mortgage, 
as will be seen, does not accept a responsibility of this kind. 
In essence, unless and until the corporation defaults in its obli- 
gations to the bondholders, the trustee has no active part to 
perform excepting purely formal administrative duties.”’ 

The scope of the trustee’s duties varies with the mortgage, 
consequently, the trustee must examine closely into the mort- 
gage provisions in each case. In our discussion herein we 
shall consider a typical mortgage; other instruments might 
impose greater or less responsibility on the trustee. The 
trustee does not seek to avoid responsibility which it might 
properly accept, but to have the mortgage clearly set forth 
its duties and responsibilities so far as it is possible to do so. 
Of course, the provisions in the mortgage relative to the 


12 William Lilly, “Individual and Corporation Mortgages,” p. 78. 


TRUSTS BASED ON CORPORATE MORTGAGE 21 


trustee should be considered in the light of the many legal 
decisions on the subject. It might well be said that trustees 
generally would be willing to accept a much greater degree 
of responsibility than at present, if adequately compensated 
for the risks involved. It is probable that the trustees’ serv- 
ices will be gradually broadened as the value of more exten- 
sive service is recognized. 


CHAPTER III 
ACCEPTANCE OF CORPORATE TRUSTS 


Securing business; preliminary negotiations.—How and 
where is corporate trust business secured? What are the 
necessary steps in establishing such a relationship? These 
questions naturally arise at the very outset of our study of 
this subject. 


Corporate trusts, from the standpoint of solicitation, are 
a most difficult subject. Appointments as trustee are receiyed 
from two main sources: (1) the borrowing corporation, and 
(2) the bankers who underwrite or sell the issue; and, strange 
as it may seem to those who are not familiar with this field, it 
is the bankers who, in the majority of cases, control the ap- 
pointment. Few corporations desiring to borrow on a large 
scale through the medium of a bond issue will undertake, them- 
selves, to sell the bonds to the public. The business of selling 
securities is highly specialized, and one or more of the bond- 
selling houses is usually requested to consult with the officials 
of the corporation, in determining the details and terms of the 
proposed issue. ‘The entire issue is then sold by the corpo- 
ration to a bond house or underwriting group at a price fixed 
by mutual agreement, or at times the sale is made after 
competitive bidding by as many of such houses as may submit 
an offer... The successful bidder and associates, if any, then 
offer the bonds to the public at a price intended to net a profit 
to the underwriters commensurate with the risk and service 
involved. The practice has grown among the banking houses 
of inserting in the underwriting contract a provision that the 
trustee shall be nominated by the bankers. ‘There are two 
reasons for this practice: (1) the bankers are interested in 
selecting as trustee an experienced and efficient guardian of 
the rights of the bondholders; and (2) the appointment, in 
the eyes of banking institutions with fiduciary powers, is desir- 
able business which the bankers like to place with their own 
friends among the banks and trust companies. 


1p, F. Jordan, in “Investments,” Chapter XVII, discusses the work of 
syndicates and bond-selling houses. 


22 


ACCEPTANCE OF CORPORATE TRUSTS 23 


Investigation of proposed trusteeships——Unless the pro- 
posed mortgagor is already a client in good standing, any offer 
of corporate trust business should be carefully investigated. 
The trust company should satisfy itself as to the character 
and ability of the corporation’s management and the reason- 
able expectancy of success in its operations. In some cases 
it may be desirable to obtain credit reports and to request 
the corporation to submit financial statements. The trust 
company also should be assured as to the standing of the bank- 
ers who are to underwrite the issue. 


Qualification in states.—One of the first questions in con- 
sidering the offer of a trusteeship under a mortgage on real 
property is whether the trustee is qualified to act under the 
laws of the state or states in which the property is located. 
This problem, while purely legal, requires constant vigilance, 
because of the wide variation and constant change in state 
laws. It would be most embarrassing to the trustee, as well 
as expensive, and perhaps seriously detrimental to the bond- 
holders if, when occasion arose to proceed under the provi- 
sions of a mortgage, it developed that the trustee could not 
act, because it was not qualified under the laws of the state 
in which the mortgage must be enforced. 


Individual and corporate co-trusteeships.— ‘Those states 
which have legislated against ‘‘foreign’’ corporate trustees 
(corporations organized under the laws of other states), by 
prohibiting them from enforcing trusts in the state courts or 
otherwise restricting their activities, cannot similarly restrict 
the individual citizens of other states.* Consequently, one 


2The United States Constitution, in Section 2 of Article IV, provides, “The 
citizens of each state shall be entitled to all privileges and immunities of citizens 
in the several states.” ‘This is the basis for the constitutional point that no 
state can prohibit a natural person, citizen of the United States, from acting as 
trustee within its borders. Some state statutes relating to trusteeship make the 
distinction between natural persons and corporations of the several states. 

When the United States Constitution was adopted, business was scarcely 
done at all in the corporate form, and the question of corporations holding 
trusteeships in foreign states certainly was not in mind. Corporations have 
grown up under special statutes of the several states and, in this connection, 
are not at all to be compared with natural persons. It has never been held 
to be unconstitutional for a state to restrict the business that a foreign corpora- 
tion may do therein, or to prescribe the conditions upon which it may exercise 
its powers. In other words, the states may admit “foreign” corporations on the 
states’ own terms. 

\ 


24 WORK OF CORPORATE TRUST DEPARTMENTS 


or more individuals often are joined as co-trustees with the 
corporate trustee. ‘he situation is sometimes met by appoint- 
ing, a9 co-trustee, a trust company or bank situated in the 
state in which the mortgaged property is located. Generally 
speaking, an individual or corporate co-trustee has no active 
duties to perform unless and until proceedings are undertaken 
to enforce the mortgage. Even in this event, while the pro- 
ceedings may necessarily be had in the name of the co-trustee, 
this situation is almost without exception directed by the cor- 
porate trustee and its counsel. Frequently a mortgage dele- 
gates to the corporate trustee the power to name a successor 
to the individual trustee in case of the death or resignation of 
the individual originally designated, or permits the appoint- 
ment of a co-trustee in case of need. 


Restrictive state statutes—Iwo or three illustrations of 
the attitude of several states toward the exercise of fiduciary 
powers by foreign trustees may not be out of place: 

Some years ago Indiana passed a statute requiring that 
intra-state trusteeships must be exercised by citizens of Indi- 
ana. [he statute has been held unconstitutional, so far as 
natural persons residents of other states are concerned; but 
prior to the decision on the constitutional point it was the 
basis for joining a resident of Indiana as co-trustee under 
mortgages on property in that state. 

In Missouri the restrictive statute has taken a somewhat 
different tack, and prohibits foreign corporations from en- 
forcing trusts of real estate in the courts of Missouri, unless 
joined by a resident trustee. The prohibition is not recog- 
nized by the Federal courts, but it has not been held unconsti- 
tutional. 

California statutes along this line started in 1913 with an 
attempt to deny to foreign corporate trustees the right to cer- 
tify bonds secured by property in California. ‘The validity 
of this statute was immediately questioned, so far as it con- 
cerned acts to be performed outside of California. However, 
during the time when the law remained in effect it resulted 
merely in the appointment as trustee of individuals, officers 
of trust companies which, but for the law, would have been 
selected in their corporate capacity. Subsequent modifications 
of the California statutes have resulted in a situation wherein 


ACCEPTANCE OF CORPORATE TRUSTS 25 


individuals or California trust companies are joined as co- 
trustee. 

At the risk of repetition, emphasis is laid on the necessity 
for legal advice on all questions involving the qualifications 
of a corporation to accept, with or without a co-trustee, trusts 
covering property in foreign states. 


Conflicting liens——As corporations have expanded, the 
complexity of their financial structure has increased, and it 
is now quite usual for a number of different liens to exist on 
the property of one corporation. In the earlier days of cor- 
porate trusteeships the situation was comparatively simple, 
as in most instances the mortgages ranked in relative order 
first, second, and so forth. ‘To-day, however, a refunding 
mortgage, for instance, may be a first lien on some of the 
property, a second lien on another part, a third lien on still 
another part, and so on almost without limit.2 There is no 
legal bar to a trustee accepting two or more mortgages with 
different lien positions on the same property, and it is often 
done.* However, the possibilities of future embarrassment 
and expense should always be frankly considered before ac- 
cepting the appointment under a mortgage constituting a lien 
in conflict with the lien of an existing trust to the same trustee. 
So long as no occasion arises to enforce the provisions of 
either mortgage, there will be no difficulty and probably no 
objection; but promptly upon the commencement of court pro- 
ceedings under either mortgage the discerning trustee will 
resign under all but one lien on the same property. ‘There 
are a number of court decisions severely criticizing trustees 
which have attempted to enforce a mortgage lien while at the 
same time acting under one or more conflicting liens. 


Examination of form of mortgage.—Promptly, upon con- 
summation of the underwriting contract covering a proposed 
bond issue and the selection of a trustee, it becomes necessary 
to draft the mortgage and the form of bond to be secured. 
Three parties are interested—the borrowing corporation, the 


3 See example in footnote 6, p. 15. 

4 However, the regulations of the New York Stock Exchange provide that 
“each mortgage, indenture or deed of trust should be represented by a separate 
trustee,” and as regards listed issues, the Stock Exchange holds to this position, 
except on application stating circumstances satisfactory to it, as the basis for a 
special ruling to the contrary. 


26 WORK OF CORPORATE TRUST DEPARTMENTS 


bankers who have underwritten and who will sell the issue, 
and the trustee. ‘The borrowing corporation having agreed 
with the underwriters as to the essential features of the issue, 
the business of preparing the mortgage is left in the hands 
of the lawyers. Counsel either for the bankers or for the 
debtor may set up the first draft of the mortgage, which is 
then subjected to a series of negotiations between the inter- 
ested parties. One draft of the mortgage will be submitted 
to the trustee and examined in detail by its counsel. Good 
practice demands that an officer of the trustee also should 
examine the proposed mortgage from a strictly practical view- 
point, and particularly with the thought of suggesting changes 
which might tend to facilitate the administration of the trust. 
Careful examination by an experienced trust officer of a pro- 
posed mortgage often results in correcting inaccuracies, clari- 
fying doubtful expressions, eliminating unwieldy provisions, 
and materially improving the mortgage at one point or an- 
other. | 

It is important that these weak points be located and 
strengthened before the mortgage is executed. While in some 
of the recent mortgages it is provided that material changes 
in the provisions of the mortgage (not including, however, 
such matters as terms of payment and interest rates) may 
be made on the written approval of the holders of a specified 
percentage, say 80 per cent or 90 per cent of the outstanding 
bonds, a most important point in considering all other mort- 
gages is that, once the indenture is executed and the bonds 
issued and distributed, no change adversely affecting the inter- 
est of the bondholders can be made without their unanimous 
consent, which is difficult and frequently impossible to obtain. 

All too often it is discovered after the bonds are distributed 
that some part of the mortgage is impracticable or is working 
an unnecessary hardship on the borrowing corporation. Un- 
less the mortgage contains special authority, it is then too 
late to make a change without the delay and expense of obtain- 
ing unanimous consent from the bondholders, if that be pos- 
sible. As a result of this difficulty the company, and some- 
times its bankers, often request the trustee to consent to 
what appear to be necessary and advisable changes without the 
bondholders’ consent. The trustee cannot give such consent 
without taking upon itself some risk, for, no matter how evi- 


Ric 


ACCEPTANCE OF CORPORATE TRUSTS 27 


dent it may be at the time that the proposed change is for the 
benefit of the bondholders as well as the mortgagor company, 
any bondholder who may later prove that he has sustained a 
loss through the act may hold the trustee to a strict accounta- 
bility. While the monetary risk is important, the risk of cen- 
sure for a breach of trust is an even greater consideration. 


Execution of mortgage.—When approved as to form! by all 
interested parties, the mortgage is executed by the debtor 
company and the trustee, in as many original counterparts as 
may be necessary (usually one counterpart for the company, 
one for the trustee, and one for each jurisdiction in which 
it is to be recorded). The number of counterparts to be 
executed is not a matter of great importance and is left to 
the discretion of the company, but each copy should be care- 
fully examined to see that it agrees with the others in every 
detail. Having a separate counterpart for each place of 
record facilitates the recording and reduces the time required 
to complete the operation. Upon execution of the mortgage 
the trustee usually retains one original counterpart, delivering 
all others to the counsel for the company or the bankers, 
with the understanding that, upon completion of the proper 
recording, all recorded originals will be filed with the trustee. 
The one point insisted upon by all trustees is that at least 
one original counterpart must always be in their possession, 
as well as complete evidence of all recordings. 

There is another point of importance to the trustee in re- 
spect of execution, that is, the mortgage frequently provides 
that execution by the trustee shall constitute a receipt by it 
for all securities or other property deliverable to the trustee 
at the time of execution, and, consequently, the trustee should 
see that full delivery is made to it of all such securities or 
property, if any, prior to delivery by it of any executed coun- 
terparts. 


Supporting papers.— Prerequisite to, and as a part of, the 
execution of a mortgage, the trustee should assure itself that 
the execution by the mortgagor company is fully authorized. 
The following is a list of the documents by which such authori- 
zation is usually evidenced: 

1. A copy of charter or articles of incorporation with all 
amendments. This document should be certified by the sec- 


28 WORK OF CORPORATE TRUST DEPARTMENTS 


retary of state for the state under the laws of which the com- 
pany is organized. It outlines the powers granted to the 
company by the state of incorporation and sometimes it also 
imposes conditions which must be fulfilled before certain pow- 
ers are exercised. 

2. A copy of by-laws with all amendments, certified by 
the secretary of the company under its corporate seal. This 
document contains the rules or regulations adopted by the 
company to control its own actions, through its directors and 
oficers. ‘Taken together items (1) and (2) should evidence 
to the trustee, first, that the company is duly organized and 
existing under the laws of a specified state; and, second, that, 
upon the corporate action proposed, it is authorized to borrow 
money and mortgage its property as contemplated. 

3. Copies certified by the secretary of the company under 
its corporate seal, of the proceedings by the board of directors, 
and, in cases where the law of the state of incorporation so 
requires, the proceedings by the stockholders, authorizing the 
execution of the mortgage and bonds. 

4. A copy, certified by the proper recording officers of the 
jurisdictions involved, of certificates of consent of stockhold- 
ers, for those jurisdictions where the law requires the filing 
of such consent. 

5. A certificate by the secretary of the company under its 
corporate seal of the election of the officers of the company, 
with a specimen of the signature of each officer. 

Upon receipt of the papers listed in items (1) to (5) 
inclusive, in proper form and properly certified, the trustee 
will have in its possession evidence of the chain of authority 
passing from the state of incorporation, through the com- 
pany’s incorporators, stockholders, and directors to its officers, 
to execute the mortgage. Additional documents, as follows, 
are sometimes necessary: 

6. A copy of order of approval of any public service com- 
mission or other public body having jurisdiction over the issue 
of securities by the company. Such copy should be certified 
by the secretary or clerk of the public body. The question of 
whether any such approval is required should be answered 
by the company and the answer accepted as satisfactory by 
- counsel to the trustee. 

7. Opinion of counsel to the company that the mortgage 


ACCEPTANCE OF CORPORATE TRUSTS 29 


gives the lien which it and the bonds issuable thereunder 
purport to create. 

8. Opinion of counsel to the company as to the necessary 
recording of the mortgage, that is, the jurisdictions in which 
it should be recorded, and whether it need be filed as a chattel 
lien as well as a real estate lien. 

While items (7) and (8) do not strictly have to do with 
the authorization of the mortgage, they are of importance 
to the trustee. It is no part of the duty of the trustee under 
a corporate mortgage to verify the lien, and practically all 
mortgages specifically relieve the trustee of this responsibility, 
which it cannot afford to assume, from the standpoint of cost 
and time. Nevertheless, the careful trustee desires to make 
sure at the time of execution that the matter of lien purported 
to be given by the mortgage and bonds and the due recording 
of the mortgage in public offices has been given adequate and 
responsible consideration by the legal representatives of the 
debtor. | 

When the mortgage goes into default, if such should hap- 
pen, it would be embarrassing to the trustee to have it shown 
that the lien was insufficient and that a small amount of inves- 
tigation on its part would have disclosed its infirmities at the 
time of the execution of the mortgage and bonds. 

9. Evidence as to the payment of any mortgage tax im- 
posed by law. The practice of the various states as to mort- 
gage tax differs, but as in some states a mortgage does not 
become a valid lien until the tax is paid, it is important for 
the trustee to have in its files evidence of the payment of any 
such tax legally imposed. 

10. Specimen of the bond or notes to be issued. While the 
text of the bond is contained in the mortgage, it is a good 
practice for the trustee to have in its file for ready reference 
a specimen bond certified by the secretary of the company. 
This is particularly valuable if the authenticity of an out- 
standing bond is questioned, for the trustee may then not 
only verify the signatures of the company’s and trustee’s ofh- 
cers appearing on the bond, but it may also verify the form 
of bond, style of engraving, tint, and, in fact, every detail. 

The papers described above indicate the usual require- 

-ments of a trustee. In some cases not all of the papers 
mentioned are required, and, in others, additional evidence 


30 WORK OF CORPORATE TRUST DEPARTMENTS 


Form 1.— Mortgage Examination Guide (front). 


Corporate Trust Department. 


BLE VINA. 5 Siete Parise otal cate anomeiiele No. of counterparts a. ...; ese 
Date executed: 74 Usados wane Counsel) sadsiwins ol Oe 
Pitle OF) Accounts ook nee sa keok bee Soba le aie a anes ne Sa 5 a sk ea 
A CT AeA be De an POORER Mee Nei Ciao ceil ele RE 


Procedure to be observed in setting up Corporate Trust Department Records. 
Enter the following symbols in the column at the left to indicate action taken 
with respect to each requirement: 


¥=Fulfilled. F=Follow-up card prepared. O=Not applicable. 


VI. 


VII. 


VIII. 


IX. 


Enter execution in (a) Documents Executed Record, (b) New 
Business Record. 

Report to (a) Officers’ Meeting, (b) Executive Committee, (c) 
Development Department. 

Prepare “History of Trust” Sheet. 

(a) Enter in ink the number of original counterparts executed 

and in pencil the number on file. 

(b) Enter document file number in red ink. 

Prepare Index Cards (a) Window file, (b) Officer’s desk file, 

(c) Statistical Department, (d) Information desk file. 

Send New Business Memos to: 

(a) Bond Registration Division, when Bankers Trust Company is 

Registrar. 
(b) Coupon Paying Division, when Bankers Trust Company is 
Coupon Paying Agent. 

(c) Commission Division. (This memo should eventually be filed 

in Reference Folder of Letter File.) 

Prepare Tickler Cards: 

(a) Maturity—Due date of issue and where payable. 

(b) General—(Duties of Trustee) 

Preparation of S. F. notices. 

Calling of bonds. 

Receipt of collateral under prior mortgages at maturity. 

Refiling as chattel mortgage. 

Cancellation of bonds on our records in case others act as 

Paying or S. F. Agents. 

6. Any other duties. 

(c) Trust Requirements* (Duties of Mortgagor) 

1. Sinking Fund payments. 

2. Redemption notices. 

3. Insurance schedules. 

4. Financial statements. 

5. Equipment schedules. 

6. Any other requirements. 

For Equipment Trusts (if variety of equipment warrants) rule off 
a blank “Title of Trust” sheet and place next to “History of 
Trust” sheet, showing class, numbers, quantity, prices and 
dates of payments for equipment. 

Obtain supporting documents (per reverse) and approval of 
counsel on execution of Indenture and documents. 

Ascertain that pledged collateral has been deposited and that 
Bankers Trust Company holds title thereto. 


VP ON 


ACCEPTANCE OF CORPORATE TRUSTS dl 


X. Write to Company for: 

(a) Signature Cards. 

(b) Insurance policies or first insurance schedule. For a schedule 
request annual date for filing. 

(c) Date fiscal year ends (when necessary and not shown by 
documents). 

(d) Any other information. 

XI. Write prior trustees (letter usually to be prepared by counsel). 

(a) Send copy of above Indenture. 

(b) Call attention to our lien upon securities held by them or 
restrictions of above Indenture upon issuance of their bonds, 
etc. 

(c) Ask for copy of their mortgage. 

(d) Send any other notices. 

XII. Memos to Corporate Trust Department re:— 

(a) Preparation of card as to splitting of temporaries and defi- 
nitives and any charges. 

(b) Notation of collection cards as to disposition of interest or 
dividends on collateral. 

(c) Conversion privilege. 

XIII. Memo to Statistical Department of statements expected from 
Company. 

XIV. Memo to Document File Clerk when firm, other than — & —, acts 
as our counsel. 

XV. Obtain all recorded originals or evidence of recording and enter 
on records. 

XVI. Obtain supply of printed copies of Indenture for our files. 


Examination completed 


(This record, when completed, should be filed in the Document Folder.) 


Form 1.—Mortgage Examination Guide (back). 


1. Certified copy of charter, or articles of incorporation, with all amend- 
ments. 

2. Certified copy of by-laws of the Company. 

3. Copy of minutes, certified by the Secretary of the Company under its 
corporate seal, showing proceedings of the board of directors, and in cases 
where the law under which the Company is incorporated so requires, the 
proceedings of the stockholders, by which the execution of the mortgage 
and bonds are authorized. 

4. Certified copies of any certificates of consents of stockholders or of their 
proceedings in those jurisdictions where the law requires such to be filed. 

5. Certificate of the election of officers of the Company executing the mort- 
gage and the bonds, with certified specimen signatures. 

6. Order of approval of any public service commission or other body having 
jurisdiction over the bond issues of the mortgagor company. 

7. Opinion of counsel to the mortgagor company that the indenture gives 
the lien which it and the bonds issued under it purport to create. 

8. Opinion of counsel to the mortgagor company that the indenture need 
not be filed as a chattel mortgage, or evidence that it has been so filed. 

9. Evidence as to the payment of any mortgage tax imposed by law. 

10. Specimen of bond or note. 


32 WORK OF CORPORATE TRUST DEPARTMENTS 


may be desirable. The question is primarily legal, and each 
case should be passed on by the trustee’s counsel. Many trust 
companies, however, furnish, for the convenience of corpora- 
tion officers and counsel, a printed list of documents usually 
required in setting up a corporate trust. In requiring these 
proofs the trustee is actuated, first, by the sense of duty which 
any person entering into a serious contract should possess to 
see that all the surrounding circumstances of the contract are 
entered into with due authority and with the observance of 
all proper safeguards; and, second, by the circumstance that 
the documents above-mentioned, or most of them, are readily 
to be obtained at the time of the execution of the mortgage, 
but might become more difficult to obtain after the lapse of 
years, when, perhaps, by reason of defaults and by disagree- 
ments in the construction of the mortgage, the debtor has 
become unwilling to furnish proofs, or to disclose its private 
record to the trustee. 


Examination of mortgage by the trustee.—Promptly upon 
execution of a mortgage the trust department will read and 
thoroughly analyze all of its provisions, in order that its 
records of the trust may be properly set up, and the necessary 
steps taken to see that the trustee’s duties are accurately and 
promptly performed. While the trustee’s general records are 
discussed in the next chapter, the “mortgage examination 
guide,” ° illustrated on page 30, will indicate the general scope 
of this examination. 

While, generally speaking, the items on the mortgage ex- 
amination guide appear to be self-explanatory, perhaps a brief 
statement on one or two points is desirable. The “develop- 
ment department’’ referred to in Item II is a modern and 
broader designation for the ‘“‘new business department.” It 
is important that in any company making an organized effort 
to develop and expand its business, the department having 
control of this effort be notified promptly of each piece of 
new business received. Item V is important only in the case 
of trust departments which have been subdivided into distinct 
divisions. Similarly, Item XIII applies only if there is a 
separate statistical department, in which case that department 


5 This form is reproduced through the courtesy of the Bankers Trust Com- 
pany, New York. 


ACCEPTANCE OF CORPORATE TRUSTS 33 


should be informed of statements expected to be received, 
in order that such statements may be delivered to the trust 
department, and not retained in the files of the statistical 
department. ‘The supporting documents referred to in Item 
VIII are those described on page 27 to 29 [ (1) to (10) inclu- 
sive] which, for convenience, are listed on the back of the 
mortgage examination guide. 

Item XI, relating to prior trustees, has to do with a very 
important matter. In many cases a mortgage pledges prop- 
erty or securities, subject to the lien of existing mortgages. 
It is then of real importance that the trustee notify prior 
trustees of the newly created subordinate lien and warn such 
prior trustees that, upon the extinguishment of the prior liens, 
the property or securities may not be redelivered to the mort- 
gagor company, but must be delivered to the trustee under 
the new lien. Sometimes, also, the new mortgage may con- 
tain a covenant “‘closing’”’ prior mortgages,’ that is, an agree- 
ment that no further prior lien bonds shall be issued. Simi- 
larly, the prior trustees should be placed on notice of such a 
covenant. 


6 See footnote, page 90. 


CHAPTER IV 
CORPORATE TRUST RECORDS 


Corporate trust records.—In presenting this material the 
authors are fully aware of the difficulty of prescribing any 
set of forms which would be applicable, in their entirety, even 
to a small percentage of banks and trust companies engaged 
in corporate trust business. Widely different conditions exist. 
The institution with a dozen trusteeships will not feel the 
necessity for some of the records which are indispensable 
to the administration of several hundred trusts. Neverthe- 
less, every corporate trustee is likely to have situations arise 
which will emphasize the value of complete records. 

This chapter is based on the records of a single company 
for several reasons: (1) the manifest advantage of con- 
tinuity in describing one complete departmental system, rather 
than the outstanding features of several different systems; 
(2) the essential simplicity of the system described, although 
at first glance it may appear somewhat complex; and (3) the 
authors’ greater familiarity with these records.” 

As will be noted from the accompanying cuts, loose-leaf 
records have been used wherever practicable. ‘The conven- 
ience and flexibility of such records recommend their general 
use and account for their adoption by most of the larger 
institutions doing a fiduciary business. In all cases where 
loose-leaf records are used by trust departments, it is impor- 
tant that there be a complete and independent audit of the 
work so recorded. Many trust departments follow the prac- 
tice of retaining bound volumes for all books of original 
entry. This furnishes an additional safeguard, and may be 
of considerable value in case it becomes necessary to submit 
the records as legal evidence. 

In the following discussion a cut is given of each record with 
a brief statement of its purpose and use. 


1 Those of Bankers Trust Company, New York City. Records of the Cor- 
porate Agency Departments are discussed in Chapters XVI to XVIII and Fee 
Records in Chapter XIX. 


34 


35 


RUST RECORDS 


CORPORATE T 


‘jsn1 yp jo AloO}sIf[—"Z WI0Y 


| 


“me, 4Q pasodut xe} a3e3}10m Auv jo yuaurded ay) 03 Se s0NapIAq 


‘pa[y Os useq sey af yey) Sotlapida 107 
‘aBeZyow jayeyd 8 sB pajy eq OU poeu piNjuapur oy) yy. Suvdwod 1o3e3\10ul ay, 0} fasunoa jd vormdG 
*ay8219 0} y1odind yt sepun ponsst cia 
aedwos i0sesjiour Syy Oy fesunod jo uojidG 
-kuedaod 2OZBBz10w oy} jo sonsst~ 2 
puoq eq) saA0 uonsipsynt Suraey Zpoq 19410 10 GOIssuimodS sd1Ajes Syqnd fuv jo jssoidde jo sJapio 
“sainjeusis uouoeds 
paynseo YM ‘spuoq ay pus eduswour ayy Bapinooxe Suvdwod a) JO Si20YO Jo woljoea 94} eo: HEIGHISD' |) 
"pery 29q OY Yons Poirier Mey oq} araym : 
SuONoIpslint eSOy) Ul SSuypasooid sey} yO JO SIapjoyyoos JO SWesuos JO EsywoyH Sus jo soldoo poyliie 
*pazliogine ole 
§puoq pus osesjiowm oy) jo UoyNdexo yolyM Aq ‘sieployys0ys ey} JO sBurpsaccid oy) ‘saumber 
qoiyas Japan Mel oy} areyMm sasvo Ut pues “GIOWSIP JO preog omy jo" 


Spuoq eq) pur if YoIyM Gall eq) sears sinjaepul Tey 


call che 
mua aR BAPE 
PUA aR a 


Os paiwiodsoour st Aueduiod 9} 
ie SSUIPIISO BUIMOYS *[8Is IjB1OGIOD sj}I Joput AULA UY joa 


eq 
“ON WWoeuins0g 


233110} SB paplosay JsNIy JO GONBSIUIMpY Jo SLOISIF{ PUB SjuaMINI0q jo p1099y 


Ney We oquavg 


38 a[qvesuvyoiawy sayBoynsied E Palspstos yg 
peresizZay Aline 


paiejnar 10 yso7T condmapay € Ouss} poze 


ye s[qesedg q = S PsyyUsissp Spuog 


aouUEINSH] : surgey 


jO SMBy Jepun ps38q Jopui adjsnIy “Od MIL sJoyaug 
peztuesio ‘OD 10s¥BZ 0K 


‘ON a[fy lueuns0g NAL JO UL 


36 WORK OF CORPORATE TRUST DEPARTMENTS 


Record of trusts.—The day-to-day transactions of each 
trust are compiled on Forms 2 to 7, termed, collectively, the 
“record of trusts.’”’ Separate binders for exchange, redemp- 
tion, and securities sheets (Forms 5 to 7) facilitate posting 
and audit. 


FORM 830 DOCUMENT FILE No. 


Title of Trust 


INSTRUCTIONS: 

This sheet will be opened for 
every new series of bonds which - 
differs from the first series. The aaa COUNTERPARTS EXECUTED 
History of Trust sheet should 
be appropriately noted with 
reference to this sheet both as 
to execution and recording. 


SUPPLEMENTAL INDENTURE DATED: 


REDEMPTION: 


Form 2A.—History of ‘Trust (supplementary sheet). 


37 


TRUST RECORDS 


CORPORATE 


*(egq) ponss] spuog jo prod9y—"¢ WIO 


—— 

| ee 
TOO ae 
bees 


f poyorny (pso224y *uByoxg aos ‘sau—aAtjop 2BuL>x2 Jo S[tej2p 104) = 2 
payjsoued Pavoatloq, SOON. PuCd uodnog suemnonseg 
Ayuoqay 


ONIGNVISLNO GNV GATTAONVO ‘CauSAITAC SANO@ JO AYVWINNS 


$ ‘onss po 
sony [FOL 


*(jUO1,J) penss] spuog jo ploday—'e WI0 7 


(2nojg wonwegnssy nay s1esVdi0D 29 sIA=P 30) 
Gqd4ILado SANOG 


88 WORK OF CORPORATE TRUST DEPARTMENTS 


Form 4.—Summary Sheet. 


w 
=) 
n 
ce 
Qa 
fa) 
N 
a4 
2) 
peo 
a 
2 
< 


CORPORATE TRUST RECORDS 39 


Immediately upon the execution of a new mortgage, a “‘his- 
tory of trust sheet’’ is opened and the salient features of the 
indenture noted thereon in the spaces provided at the top of 
the sheet (Form 2). The columns at the right are reserved 
for mortgage recording data. The remainder of the sheet 
is devoted to a chronological history of the administration 
of the trust compiled from documents received or originated 
by the trustee. Before being entered each document is en- 
dorsed with a brief typewritten summary of its subject matter 
and is assigned a number. The entry of documents usually 
required at the time of the acceptance of the trust is simplified 
through printing on this sheet a schedule of such documents. 
In addition to its value as a history, this sheet forms a com- 
prehensive and convenient document index. In dealing with 
a mortgage authorizing the issuance of bonds in series, a 
‘supplementary sheet’? (Form 2 A) is used for each new 
series, as it is impracticable to summarize more than one series 
on the main history of trust sheet. 

The “record of bonds issued sheet” (Form 3) is the control 
record of bonds received, certified, delivered, and canceled. 
It indicates, at a glance, the status of a bond issue. Postings 
to these sheets are made from the “security tickets’ (Forms 
10 to 15), with the exception of bond certifications, which 
are posted from the “‘certification blotter” (Form 9). Any 
delivery which does not constitute an additional issue under 
the mortgage is “circled”? without increasing the total of 
bonds delivered. ‘The delivery of a duplicate in lieu of a lost 
bond is an example of an entry of this kind. In the two 
memoranda columns on Form 3 (back) are recorded entries 
affecting the amount of bonds held in the vault awaiting 
certification or delivery. When, as in most large modern 
mortgages, issues of bonds are authorized under several 
sections, a “summary sheet” (Form 4) is used to provide 
a continuous record of the amount of bonds outstanding under 
each section, and to prevent an overissue under any section. 
This sheet is filed directly following the ‘“‘bonds issued” sheet 
and entries are made as the record of bonds issued is posted. 

- The “exchange sheet”’ (Form 5) comprises the detailed rec- 
ord of bond exchanges, that is, (a) the delivery of definitive 
(permanent) bonds upon the cancellation of temporary bonds, 
or (b) interchange of denominations, referred to in the par- 


WORK OF CORPORATE TRUST DEPARTMENTS 


40 


"yous osueyoxyA—'s WI0T 


aqagqAITAG AONVHOXE NI AaAIaOFa 


SAONVHOX ANOd” Pee SHIMAAITAC GaTIv Lad 


¢ ‘adueyoxy siqyy jo 
qunowy pezuoyjny 


CORPORATE TRUST RECORDS 


ANSI 
‘ONY Ni Gata At 
“UBdOUd 1d139SY SIHL 

#20 YSONSYYNNS NOd 
HAWOLSND | srevusarac 3a TM 
MOBHD UNO saLLIUNDas 


NOILVSISILNSOI LNOHLIM JO3RN3SH 
USUVSE SHLOLOGAYSAITSG 3S AVW'S3ILINNDSS HONS LYHL 
ANVdNODS LSNYL SYSANVE SHL HLIM SEY OV LdIaD3y SIHL 
Ad GSLN3S3ud3y S3iILINNDAg JO SHANMO YO YSNMO SHL 


Elli 
LNNOWY 


NOI Ldlwd5S30 
L3gYULS TIVM 91 


ANYANO9 ISMUL SHBYNVE | sLvuosioa 
; WOus G3AIZOFY 


6h MYOA MAN 


el 

Ny 

Le 

Hy 

MELT 
i c| | ; 


DELIVERED 
$100 BONDS 


$500 BONDS 
NUMBERS SERIES NUMBERS 


RECEIVED 


19__. ADDRESS 


DEPOSITOR 


il 


SERIES 
CHECK DELIVERED $ 


AM OUNT 


INSTRUCTIONS 


$1000 BONDS 
NUMBERS 
a See 
— 
— | 
——— 
—— 


AMOUNT 


| No. £114773 


Form 5A.—Exchange Ticket. 


Ay 


42 WORK OF CORPORATE TRUST DEPARTMENTS 


lance of the bond houses, as “splits.” The number of the 
“exchange ticket’? (Form 5A) is inserted-after each entry, 
so that ready reference can be made to the customer’s receipt. 
Form 5A is a numbered ticket which originates when securities 
are received for exchange from temporary to permanent form, 
or for interchange of denominations. ‘The ticket is divided 
into three sections: (1) the customer’s receipt; (2) the body 
of the ticket, which remains with the new securities until they 
are delivered; and (3) the auditor’s stub, which is attached 
to the canceled securities. “The exchange sheet is also used 
to record conversions of one class of security into another, 
say, bonds into stock. A “title sheet” (Form 5B), giving data 
and instructions as indicated thereon, precedes each account 
in the exchange record. 

The method of exchanging temporary for permanent bonds, 
conformably with the records described in this chapter, is 
as follows: 

The temporary bonds are received over the counter or 
by mail and (after preparation of exchange tickets) are 
entered on the exchange record (Form 5), opposite which 
are entered the permanent securities, when allotted. At the 
end of the day (1) the exchange record is totaled, (2) the 
surrendered bonds are counted, and (3) the total of the per- 
manent bonds allotted is calculated by the difference between 
the lowest serial number of the bonds available at the begin- 
ning of the day and the lowest serial number of the bonds 
remaining at the close of the day’s business. These three 
figures must agree. The bonds surrendered are then canceled, 
and placed in a safe available to the auditors, who, on the 
following morning, verify the canceled bonds against the 
amount of permanent bonds shown by the exchange record to 
have been delivered. 

The exchange record serves, so far as exchange transac- 
tions are concerned, as a book of original entry, and no entry 
is made in the corporate trust blotter. As soon as the de- 
partment is to commence an exchange, a memorandum ticket 
is prepared covering the amount of permanent bonds allocated 
to the exchange. ‘This ticket is posted to the record of bonds 
issued (Form 3) as a delivery in exchange for temporary 
bonds, with a reference to the exchange record for details. 
At the same time a cancellation entry is made in the record 


CORPORATE TRUST RECORDS 


EXCHANGE RECORD TITLE SHEET 


DocUuMENT FILE NO,——. 


ACCOUNT 


INTEREST DATES TRUSTEE 


VAULT INDEX 


[C00 Vole ie ee eae Oe Sekar a 
[ay ae aL cae 


INTERDENOMINATIONAL EXCHANGE (S) 


INSTRUCTIONS RECEIVED 


CONVERSION (C) 


CASH ADJUSTMENT 


DISPOSITION OF SECURITIES 


SPECIAL INSTRUCTIONS 
RBI 


Stop NumBers 


Form 5B.—Exchange Record Title Sheet. 


a 
3 
a 


43 


44 WORK OF CORPORATE TRUST DEPARTMENTS 


& £ 
3 Z 
ils 
8] § 
tes § 
2 é 

5 e 
Al @ 


Form 6.—Redemption Sheet. 


Total Par Value $ 


CORPORATE TRUST RECORDS AS 


of bonds issued, covering the cancellation of all the temporary 
bonds. The advantage of keeping the mass of detail involved 
in such an exchange on subsidiary, rather than on the main 
trust records, is obvious. 

Payments of bonds, whether at maturity or upon prior 
redemption or purchase, are entered on the “redemption 
sheet” (Form 6) from the “redemption ticket” (Form 6A) 
which carries full details of the transaction. While this sheet 
and.ticket are similar in principle to those used for exchanges, 
an important difference lies in the omission from the redemp- 
tion record of the depositor’s name and the bond numbers. 


4 
No. 50751 (DO NOT TAKE OUT OF THIS OFFICE) LETTER OF 
DATE______- DEPOSITOR 
ADDRESS 


CHECK 


CREDIT ” 


PAR VALUE DESCRIPTION OF SECURITIES—ONE KIND ONLY— 


SS 
COUPON ATTACHED 


PRINCIPAL —— 

Bankers Trust ComPANY 
PREMIUM ENT CORPORATE TRUST DEPARTMENT 

CHECK No. aren COUNTERSIGNED. 
CHECK fOR PROCEEDS OF 
TOTAL... ; ES REPRESENTED BY 
THIS TICKET WILL BE DELIVERED 
NOS. ENTERED AGAINST SURRENDER HEREOF 
ON REVERSE. ANO PROPER IDENTIFICATION 


Form 6A.—Redemption Ticket. 


The elimination of this data relieves the department of a 
considerable burden of detail and materially accelerates serv- 
ice at times when speed is essential. Exchange and redemp- 
tion tickets are consecutively numbered, and carefully pre- 
served, and every ticket number must be accounted for at the 
close of each day’s business. On the day following their 
payment all canceled bonds are counted by the auditors and 
the total of each issue proved to the departmental figures. 
In other words, the auditors treat the canceled bonds as 
vouchers and there must be canceled bonds to an amount 
equivalent to the cash disbursed for bonds during each day’s 
business. The canceled bonds, as audited, are stamped or 
perforated by the auditors to guard against the possibility 
of a resubmission of the same bonds. 

~ Securities other than those received for one of the purposes 
heretofore mentioned are posted to the “‘securities ledger” 


46 WORK OF CORPORATE TRUST DEPARTMENTS 


Disposition 


Principal Due 


Interest or 
Dividends Due 


Form 7.—Securities Ledger. 


Q 
a 
a 
a 
a 
n 
24 
4 
om 
Q 
Q 
Zz 
a 
Q 
a 
x 
= 
0% 
=I 
oO 
a 
w 


Details (from whom received or delivered to, certificate numbers etc ) 


CORPORATE TRUST RECORDS Al 


(Form 7). <A large percentage of accounts in this record 
represents securities pledged as collateral. The sheets are 
ruled with four sections to a page, each section normally 
pertaining to a different class of security; but an entire sheet 
may be devoted to one security if circumstances so require. 
Under some trusts, where a large number of different securi- 
ties are handled by the trustee, Form 7A may be considered 
preferable to Form 7. Only one security is entered on each 
sheet of Form 7A. ‘This type of sheet is most useful in very 
active accounts. 


Form 7A.—Securities Ledger (suitable for active accounts) 


Blotters.—The ‘‘corporate blotter’ (Form 8) is a sum- 
mary of the receipt, delivery, and cancellation of securities. 
Transactions are entered in the blotter from the security or 
“vault tickets’ (Forms 10 to 15) which will be explained 
presently. The “certification blotter” (Form 9) is designed 
to record, authorize, and provide a means for audit of the 
certification of securities. Under each sheet of this record 
(which is in book form with 8 numbered divisions to a page) 
are correspondingly numbered perforated slips. The carbon 
copy on the perforated sheet (Form 9A) is detached, ini- 
tialed by a departmental officer, and presented to the officer 
signing the bonds as his authority for so doing. The signing 
officer retains the slip and delivers it to the auditors. 


Security transactions.—No securities are received or de- 
livered by the department except upon authority of a security 
or “vault ticket” (one of Forms 10 to 13) initialed by an 
officer. Entries in the corporate blotter are made from these 
tickets, and postings to sheets 3 and 7 are based on the posting 
copies (carbon copies) of the tickets. | 


48 WORK OF CORPORATE TRUST DEPARTMENTS 


Collateral 


DEPOSITS OF 
TEMPORARY WITHDRAWALS 


Bonds Issued 


Cancellations 


Temporary 
Deposits 
| 


Collateral 


_ TEMPORARY WITHDRAWALS 


VAULT DEPOSITS 


Bonds Issued 


Temporary 
Deposits 


Deliveries of 


VAULT DELIVERIES 


Bonds Issued | 


fa 
ud 
E 
D 
‘e) 
a 
ud 
Q 
” 
ud 
2 
cc 
ad 
O 
uu 
7) 


SECURITIES DELIVERED OR CANCELLED 


CORPORATE TRUST BLOTTER. 


a 
LJ 
i 
pe 
O 
—l 
ae 
‘iad 
Y) 
7) 
oO 
fa 
LJ 
ee 
<— 
Ae 
O 
OW 
oc 
O 
O 


ACCOUNT 


-_ 5 > Bs -- —e- ~ 


i) 


=] 


Form 8.—Corporate Blotter. 


CORPORATE TRUST RECORDS 49 


DATE 


CERTIFIED BY 
TITLE 


AMOUNT $ 
—_— DENOMINATION $ 


BONDS COMPARED 
EXAMINED FOR EXECUTION BY. 


EXAM'D FOR CERTIFICATION BY 
TAX STAMPS 


POSTED 


Form 9.—Certification Blotter. 


TRUST SEPARTMENT. 


BANKERS TRUST COMPANY 


19 dla a a —no__1 7664 | 


MR. | PLEASE CERTIFY THE FOLLOWING 
TITLE 


, : AMOUNT $ 
NOS. DENOMINATION -$ 


Si eS es 


FORM OF BOND HAS BEEN 

COMPARED. WITH MORTGAGE 

AND ' 1SSUE’ IS PROPER ———_______- - APPROVED FOR EXECUTION 
By. 

N. B.—THIS SLIP IS TO BE TRUST DEPT. 

INITIALED BY THE SIGNING 

OFFICER AND PLACED IN 


AUDITORS BOX, SIGNING OFFICER 


Form 9A.—Certification Slip. 


All tickets are written or typed in duplicate with the excep- 
tion of “temporary withdrawal tickets’ (Form 13) which 
are typed in quadruplicate. The original vault tickets serve 
as authority to the vault for the withdrawal or deposit of 
securities. All trust securities in the vault are kept in double 


50 WORK OF CORPORATE TRUST DEPARTMENTS 


combination safes and each deposit or withdrawal must be 
witnessed by (1) an officer or a vault officer, and (2) one 
of several designated clerks. After securities have been de- 
posited or withdrawn the tickets are retained by the vault 
oficer and delivered to the auditors. The auditors maintain 
an independent set of control ledgers which are proved from 
time to time with the ledgers of the trust department. We 
shall first explain the vault control system in a general way 
and then make a more detailed examination of the form of 
the tickets. 


Fu79 Oats 


VAULT DEPOSIT 
TICKET No. CT 


192_. 


BANKERS TRUST COMPANY... 
CORPORATE TRUST 


ACCOUNT TRANSACTION 


—— 


it UNITS ‘Cor AMOUNT _ DESCRIPTION 
i fil | 


\ 

| 
i 

‘ 


Form 10.—Vault Deposit Ticket. 


The vault control is based on a system of control units 
established as follows: 

A. For corporate bonds, notes, and like securities, includ- 
ing deposit receipts therefor (where bonds are canceled the 


CORPORATE TRUST RECORDS 51 


title of account should so state), each dollar or other standard 
of currency in which principal amount or par value is expressed. 

B. For “bonds and mortgages” and other evidence of in- 
debtedness not otherwise provided for, each dollar or other 
standard of currency of unpaid principal. 

C’. For stock, each share and part of a share contained in 
each certificate. 

D. For subscription warrants and receipts and participa- 
tion receipts, each share or dollar, as the case may be, in 
which the face of the warrant or receipt may be expressed. 

E. For all other valuables not in support of an item under 
control, each paper, package, or single article. 


Securities and other valuables having been assigned a value 
under control units must, thereafter, in all transactions, retain 


pecs 
192 VAULT DEPOSIT POSTING 


CORPORATE TRUST aemmamerierEaT caudeicsie vito TICKET No. CT 
ACCOUNT TRANSACTION 


CONTROL UNITS ACTUAL AMOUNT 
sai 


Ee eee eee SCRIPTION Re eat Sede ea pds aitpeeee et eget ote pee eons 


| 


| 


Laat NS EnoRe CHECKED [PROPERTY CARDS NEW STENCIL Lud 


ee ee | | | | 


VAULT INDEX 
————————————————————————S 

INCREASE STENCIL TO TITLE PLATE 
———————————————— Es 


NO STENCIL REQUIRED 


Form 10A.—Vault Deposit Posting Ticket. 


52 WORK OF CORPORATE TRUST DEPARTMENTS 


that value, unless suitable adjustments of account, including 
the control, are made. 


Payments on account are treated as follows: 


A. Upon “bonds and mortgages” and other evidence of in- 
debtedness, as deliveries. 


B. Upon subscription warrants and participation receipts, 
as memoranda. ‘They are entered ‘“‘short” in the ledgers 
upon the deposit side. When subscription warrants or par- 
ticipation receipts are temporarily withdrawn for payments 
thereon, such payments are made to appear on the deposit 
or temporary withdrawal slip. The amounts of such payment 
are not included in the control. 


Papers in support of the items under control, unless they 
be in the form of collateral having an independent value, need 


VAULT DELIVERY: 


“a Sono Franee ace a eos ecm ec TICKET No. CT 
ACCOUNT TRANSACTION 


CONTROL UNITS ACTUAL AMOUNT DESCRIPTION 
arene == as = ne 
| 


AUDITOR'S COLUMN APPROVED VAULT WITHDRAWAL WITNESSED BY 
BLOTTER CasH LEDGER 


Form 11.—Vault Delivery Ticket. 


CORPORATE TRUST RECORDS 53 


not be entered in the control, but must be fully described in 
the appropriate record and be jacketed and kept with their 
respective control items. 

Cents, and denominations of currency smaller than the 
standard money of account of other countries, are ignored 
in the control, though carried in the ledger accounts, as are 
the exact fraction of shares of stock. 


RATE 


VAULT DELIVERY POSTING 


$92 ssl SOE SOR UAL SA einen salary 
CORPORATE TRUST TICKET No. Ge 


ACCOUNT TRANSACTION 


CONTROL UNITS ACTUAL AMOUNT DESCRIPTION 


Form 11A4,—Vault Delivery Posting Ticket. 


Jewelry and papers which it is undesirable to enter separ- 
ately in the ledger are sealed after being inventoried and a 
copy of the inventory placed on the outside of the package 
and entered in the record of trusts showing the same in the 
control merely as a sealed package “‘details of contents as per 

~record of trusts.” 


54 WORK OF CORPORATE TRUST DEPARTMENTS 


Many institutions employ a “dollar” rather than a unit con- 
trol. Either scheme is satisfactory if consistently maintained 
in assigning control values to items such as no-par-value stock, 
foreign securities, and fractional shares. 

With respect to, the ‘temporary withdrawal” and “tempo- 
rary deposit tickets’? (Forms 12 and 13), it is worth while to 
note that the practice of the auditors is to retain the original 


DATE 


TEMPORARY DEPOSIT 


CORPORATE TRUST TICKET No. CT 


ACCOUNT TRANSACTION 


INTROL, UNITS ACTUAL AMOUNT DESCRIPTION 


No WRITING IN THIS SPACE 


Form 12.—Temporary Deposit Ticket. 


of each ticket as an indication that the transaction is incom- 
plete, while the department retains the carbon copy of the 
ticket until it is finally indorsed and used as a deposit or de- 
livery ticket, as the case may be. ‘Transactions not completed 
within a reasonable time are investigated by the auditors. The 
temporary tickets are not an essential part of the control 
system; but they are a great convenience to the trust depart- 


CORPORATE TRUST RECORDS 55 


ment in simplifying the recording of temporary transactions, 
and to both the department and the auditors in properly fol- 
lowing up the completion of such transactions. 

Forms 14 and 15 are “cancellation” and “split” tickets 
which are operated along the same lines as the vault tickets, 
although they do not affect the vault. The cancellation tickets 
are posted to the canceled column of the record of bonds is- 
sued (Form 3) and the “‘split’’ tickets are used to reduce the 
vault column balances on the same sheet. 


DATE 


DELIVERY OF TEMPORARY 
DEPOSIT TICKET Ne. CT 


CORPORATE TRUST 


ACCOUNT 


TRANSACTION 


CONTROL UNITS 


ACTUAL AMOUNT 


DESCRIPTION 


DESCRIPTION AND TRANSACTION VAULT DELIVERY No. INITIAL 


ORIGINAL ENTRY IN DELIVERY 
BLOTTER Rep, Boor 


| 


Form 12A.—Delivery of Temporary Deposit Ticket. 


It will be noted that all of the security tickets just described 
are uniform in size and general set-up. The entries under the 
heading of “‘transaction” at the top of each ticket should not 

be too brief to indicate, clearly, what has taken place. Infor- 
mation as to the source of the trustee’s authority is always 


56 WORK OF CORPORATE TRUST DEPARTMENTS 


valuable. For example, a typical explanation of a delivery of 
bonds would read “Delivered to , Lreasurer of Com- 
pany, pursuant to Article II, Section 1, of mortgage.” 

The column for actual amount is used only when that 
amount differs from the amount entered under control units. 
In the space for description should be entered complete de- 
tails of the securities—the full title, interest or dividend dates 
and rate, maturity date, par value, and bond or certificate 
numbers. 


DATE 
Ma | BANKERS TRUST COMPANY, MEO a Tee LOZ 
CORPORATE TRUST 5 TICKET No. CT 
ACCOUNT . TRANSACTION 


CONTROL UNITS ACTUAL AMOUNT DESGRIPTION 


No WRITING IN THiS SPACE 


VAULT INDEX eH 


ECKED TO EI 1 H AUDITOR'S COLUMN 
LEDGER BLO’ R BLOTTER CASH 


Form 13.—Temporary Withdrawal Ticket. 


The purposes of the blocked spaces at the bottom of each 
ticket are indicated by their titles. Each space is initialed or 
filled in as the ticket is passed along. ‘The space for “‘prop- 
erty cards’ on each posting ticket relates to Forms 16 and 
17. ‘These cards are indexed under the name of the security. 


CORPORATE TRUST RECORDS 57 


Reference to the card of any given security issue quickly deter- 
mines the account or accounts interested in a situation bearing 
upon the status of the issue. As reports are received of 
changes in capitalization, reorganizations, bond redemptions, 
and so on, these cards are examined and appropriate action 
taken or suggested. 


DATE 
E Re | CANKe es TeUst COMPANY MUA NCA Ra 
CORPORATE TRUST P , POSTING TICKET No. CT 


ACCOUNT ‘TRANSACTION 
CONTROL UNITS ACTUAL AMOUNT DESCRIPTION 


NEW STENCIL 


INCREASE STENCIL TO 


NO STENCIL REQUIRED 


Form 13A.—Temporary Withdrawal Posting Ticket. 


The “stencil”? information referred to on the posting ticket 
is for use in preparing or revising security stencils. ‘These 
stencils, or embossed metal plates, are illustrated on page 63.” 

The use of stencils greatly facilitates making up the “‘col- 
lection register” (Form 18) and the preparation of lists of 
securities required from time to time by mortgagors and 
others. In both cases the result is highly satisfactory. A 


2 Stencil cuts reproduced through courtesy of Addressograph Co. 


58 WORK OF CORPORATE TRUST DEPARTMENTS 


collection register with each item stenciled is preferable to a 
hand-written record and, if the stencils are properly kept up, 
no collection items will be missed. The ‘“‘symbols’’ appearing 
in the lower right-hand corner of each stencil card indicate 
the instructions in effect as regards income on the securities. 
For example: 

C indicates all coupon items on which the interest is. col- 
lected. 

DH, coupon items from which the coupons are regularly 
detached and held for disposition. 

DU, coupon items from which the coupons are detached and 
delivered uncanceled. 

DX, coupon items from which the coupons are detached, 
canceled, and delivered. 


: - DEPOSIT OF TEMPORARY 
DA ei OO MINRA@! WITHDRAWAL TICKET 


CORPORATE TRUST 
No. CT 


ACCOUNT TRANSACTION 


a 


CONTROL UNITS ACTUAL AMOUNT DESCRIPTION 


DATE UNITS DESCRIPTION AND TRANSACTION VAULT DEPosiIT NO. INITIAL 


‘VAULT INDEX 


SECURITIES ENTERED IN 
NED rR 


Form 13B.—Deposit of Temporary Withdrawal Ticket. 


CORPORATE TRUST RECORDS 59 


QO, coupon items from which coupons are not detached and 
other items on which income is not collected. 

R, fully registered bonds, stock, or notes on which interest 
or dividends are regularly received. 

S, items subject to special instructions. 


DATE 


: a — com DEPOSIT OF TEMPORARY 
mg | BANKERS Teust COMPANY, | Munem 
CORPORATE TRUST x 79 ct aa TICKET No. CT 

ACCOUNT TRANSACTION 


CONTROL UNITS ACTUAL AMOUNT DESCRIPTION 


DaTe UNITS DESCRIPTICN AND TRANSACTION VAULT DEPosiT No. INITIAL 


ae 


VAULT INDEX oo varies eee = CHECKED |PROPERTY CARDS REMOVE STENCIL 
DECREASE STENCIL TO 
SS =— 
NO CHANGE REQUIRED 


Form 13C.—Deposit of Temporary Withdrawal Posting Ticket. 


Stencils are tabbed for the month in which interest or divi- 
dends are payable. For this purpose 6 tab positions are used, 
the first indicating January and July, the second, February 
and August, etc. Title plates (Fig. 4) show the title of 
account as it appears in the “‘security ledgers” (Forms 7 or 
7-A). These, also, are appropriately tabbed. By use of an 
automatic selector it is possible to print only the stencils 

~ tabbed for a given month and to skip all others. 

Some trust officers may feel that the volume of securities 


60 WORK OF CORPORATE TRUST DEPARTMENTS 


passing through their departments does not justify the ex- 
pense of a system involving all the operations just outlined. 
Under such circumstances, it is feasible to simplify the process 
of recording security transactions. Several methods present 
themselves; for instance, it would be practicable to eliminate 
posting tickets entirely and substitute a detailed blotter from 


Vas tuihisne and iatanameanenar Gale aieemettel CANCELLATION N 


CORPORATE TRUST 


ACCOUNT TRANSACTION 
BONDS ISSUED 


DESCRIPTION COUPON ATTACHED 


Form 14.—Memorandum of Cancellation. 


which the ledgers would be posted. Another method prob- 
ably could be worked out whereby the summary blotter would 
be retained and only a single copy prepared of each security 
ticket (except temporary withdrawal and temporary deposit 
tickets which would have to be in duplicate). Such a scheme 
would require the posting of each ticket to the ledger before 
its delivery to the vault or to the auditors. 

The security stencils present many advantages to the trust 


CORPORATE TRUST RECORDS 61 


department whose business is large enough to warrant their 
installation. However, the cost of equipment and the salary 
of a specially trained operator must necessarily restrict the 
use of the stencil system to institutions where it can be justi- 
fied on economic grounds. 


MEMORANDA OF 
spLits No. 


CORPORATE TRUST 


SUMMARY OF SECURITIES OF ONE DENOM- 
INATION DELIVERED IN EXCHANGE FOR 
OTHER DENOMINATIONS CANCELLED, 

(SEE EXCHANGE RECORD FOR DETAILS) 


BONDS ISSUED 


DESCRIPTION 


EXCHANGE BOOK ENTERED 
D IN BLOTTER CHECKED IEDR 


EXAMINE! 


CHECKED | 


| 


Form 15.—Memoranda of Splits. 


As part of the securities control, the auditors make 
unannounced examinations of the department in addition 
to the regular examinations by directors, the clearing house, 
and the banking department. During these examinations the 
auditors’ duplicate records are availed of by the examiners 
counting the contents of the vault, thus permitting the undis- 
turbed use by the department of its own records. ‘Customers 
verifications” of each account (Form 19) are secured period- 
ically by the auditors and checked with the trust department 
records. 


62 WORK OF CORPORATE TRUST DEPARTMENTS 


BONDS 


INTEREST PAYABLE RATE PRINCIPAL DUE 


HELD| FOR ACCOUNT OF AMOUNT 


Form 16.—Property Card (Bonds). 


STOCK CLASS 


DIV PAYABLE RATE PAR VALUE 


HELD FOR ACCOUNT OF | SHARES 


FORM 1772A 


Form 17.—Property Card (Stock). 


CORPORATE TRUST RECORDS 63 


200 shs American Tel & Tel Co Capt.Stock |% 
Pe eel dil fed ae ae Oa a 


i =. fa 


ts? 3 ig? wsotsowA ala OOS Ry 
Cos tTELAL DG veep 


1 $50000 Pennsylvania R.R. Co Genl Mtge 
Series B 5s due Dec 1 1968 
En Ganel cel 


oat Liad 0D Ff  sduesvfyasaat! OOOOT3 
3d9f £ vat oud ad If aod 
COL 5 out 


" Fig. 3.—Security Stencil (Bonds). 


WORK OF CORPORATE TRUST DEPARTMENTS 


64 


dO HLNOIW 


"1d30 LSNYL SLYYOdYOO 


*I9}SISIY UOTIIT[ODN—"ST W109 


NSOJaNOsS - NO ATaVXVL = S33¢udq XV.L- a 


QaLOATIOD SANACIAIC GNVY SNOdNOD 


CORPORATE TRUST RECORDS 65 


pee 


4 

/ California Manufacturing Company lst 

Me Mtge dated May 1 1925 Sinking Fund 
Account. 

wee 


Sal goeseeuod getsotostere sll aie 
Hse guttertZ SIIt £ ysM dovad ag7zil 
TuswodgoN 


Fig. 4.—Stencil Title Plate. 


New York,. 


Deer 
Please find below statement of securities held. by. this Company at clove of business. 


for the account of 


If you find that the statement agrees with your records please sign the attached verification‘and return it to us in 
the enclosed addressed envelope, retaining the original for your files. 


Par’ Value i Bonds: 
whleapr ge DESCRIPTION OF SECURITIES 


eeneee ec eesee Leven Sy ey ry Very truly yours, 


BANKERS TRUST CO. 
By 


Form 19.—Customer’s Veritication (Original). a, 


66 WORK OF CORPORATE TRUST DEPARTMENTS 


The Auditor, 
Bankers, Trust Co., 
New York. 
Dear Sir: 


The staternent of securities held by the Bankers Trust Company at close of business 


far the adcount .of 


as listed below is hereby acknowledged and agrees with our records. 


Par Value of rag 


or er oO! 
Shares of Stock Wie 


DESCRIPTION OF SECURITIES 


CGS Lea 


By 


THIS VERIFICATION SHOULD BE SIGNED ONLY BY THE PRINCIPAL OR BY AN OFFICER OR AGENT THEREUNTO DULY AUTHOR(ZED 


Form 19.—Customer’s Verification (Duplicate). 


Cash records.— Entries in the “trust ledger” (Form 20) 
are based upon trust memoranda tickets and are checked 
against corresponding entries made in the “journal” (Form 
21). “Memoranda tickets” (Forms 22 and 22A) officially 
approved, authorize ledger and journal entries affecting de- 
partmental funds, but “credit”? or “charge tickets’ (Forms 
23 and 24) are required where other departments are con- 
cerned. The stub portion of Form 24 is used by an officer 
who signs checks in payment for securities purchased, to check 
such payments with the deposit of the securities in the vault. 
Form 25 is the “‘reconcilement”’ or “proof sheet” of the de- 
partment, prepared at the close of each day’s business and 
delivered to the general bookkeeper of the company. 

The “collection register’’ (Form 18, illustrated on page 
64) is designed to relieve the cash journal of the detail in- 
volved in the collection of income on securities held by the 
department. The sheets comprising the register are in loose- 


67 


CORPORATE TRUST RECORDS 


‘IaspeyT YSeg— 0Z W190 


= tT oe ps EE SR ee 
BER RBe Sree eee ere BE 0 
epee esol pe cad CPE — Pie eect eA 
SSE CIS Rie Bilie = ahi aks all + HP Le Fe 2 | ae eee eet ee 
ott eet Stet | net CLT LL ica Oc | some, 6 0 Sept ae ee 
DiS Be me ime aii HH : TUES i Seed See eee ee et Bh 
Sigel Eee ie aly mal al Hf is oe eae 
isay3Lni 3u33| 2 eee = 1 di 


atyao - oo. ~ ale een enc 


41S3YNSLNI a eet 


a ae aa a na CONV MONA 6ose WYO 


68 WORK OF CORPORATE TRUST DEPARTMENTS 


leaf form and, except for dates and amount of income, are 
prepared from the stencils. Postings to the trust ledger are 
made directly from this register, a single entry recording the 
aggregate of each day’s collections in the journal. 

‘Trust checks’ (Form 26) are not in book form, but are 
bound in pads of one hundred, numbered consecutively. No 
check is signed by an officer unless the corresponding stub is 
presented with the check. This stub is detached, initialed by 


Corporate Trust Department Journal 


aioe 
Roe Ht HH ia 
OT] 


ACO ACO 
CTE ETT TU [+h 
PUT TTT 
TT 


Form 21.—Cash Journal (Right). 


-L 
| 


A rts CORPORATE TRUST MEMO 


$ 


CREDIT__ 


OFFICER 


Form 22..\-Memoranda Ticket. 


CORPORATE TRUST RECORDS 69 


the signing officer, and delivered by him to the auditors who 
record the issuance of the check in a check register, whence 
it is marked off at the time the canceled check is returned 
through the clearings. The issuance of checks is recorded on 
the trust department journal through the departmental memo- 
randa tickets. 


F 922-5-23 


CORPORATE TRUST — REDEMPTION MEMO 


Reeeraty rm wes Pease et. ot 192, Pee ee ne ee ee 
DEBIT % 
FOR FLA 
Re ete aT $ 
OTHER CHARGES 
CREDIT 
TRUST CHECKS OTHER CREDITS 


ACCT. OR DEPT. AMOUNT 


—- |———_$|§ ——— | | | 


j TOTAL CHECKS (OR CARRIED FORWARD) | MEE Slee alt a 


ee — = 
PREPARED BY CHECKED OFFICER 


Form 22A.—Memoranda Ticket (for Redemptions). 


Miscellaneous.—When any instrument of a formal char- 
acter required of the trustee is presented to an officer for 
signature, it must be accompanied by a ‘“‘documents executed 
slip’ (Form 27). The slips are in book form, twelve to a 
page, similar to the certification blotter. The original of each 
forms the departmental record, while the carbon copy 1s 
retained by the signing official and delivered to the auditors. 


70 WORK OF CORPORATE TRUST DEPARTMENTS 


‘Tickler” cards (Form 28) are filed alphabetically, while 
the tabs at the top index them by date. From these cards 
monthly work sheets are prepared listing current maturities, 
trust requirements, and general items to be given attention by 
the department. 

The “follow-up” or “pending card” (Form 29) was de- 
signed as a step toward insuring proper attention to matters 
requiring action at some future date. These cards are orig- 
inated by members of the department, collected by a file 
clerk, and retained in the file room until the date specified 
thereon, when they are brought to the attention of the de- 


BANKERS TRUST COMPANY 
New York, 132. 
CREDIT, 
For 


“APPROVED 


OrFicER 


Form 23.—Credit Ticket. 


F. 130 OFFICERS MEMO. 
BANKERS, TRUST COMPANY 
A, 
New York, 192 oe § 
CHARGE, ; 
Broker 
For p : Uarta ad Se P ee oa 
Amt. Ck. $ 


APPROVED 


CLE = Taro ee OREICER 


Form 24.—Charge Ticket. 


CORPORATE TRUST RECORDS ae 


partment. The cards are filed in chronological order while 
any accompanying papers are detached and arranged alpha- 
betically. If the pending matter is not cleared on the date 
originally fixed, the card is marked with a new date and re- 
turned to the file room. 


= - aint — 


CORPORATE TR 


oe 
—A 
—j 
eS) 
re) 
: 
4 
= 
ti 
1 
Fi 
v2) 
2) 
O 
kaa 8 | 


For 192 


(a a aad 
WS aS eae ey eee Rc 
gn ee Credit Clerk GA AAnBaE 
STARR a ee Loan Department PRUE NG 
Ree eee key A Man Tatler 82 Ey ee A 
SGI at es aa “Other Office Teller AOS Se aes 
hen OD Coupon Paying Dept CORREO ius 
of OSCE ES ae eee ne eel 
OLAS Gd Sa 
cL el eee ee ee 
Seas pe Dept i Ee 
ood EET BLS OG FE i cs ea OS WAT 
ere eter seer eo Ee 
he ETE TE Sr a inca es A 
OUTS DOS a la i a Cd 
SEBS ae he res Customers Securities Department Ce SR 
Se a 
Bee meiner oN pe 
Deere eee ET 
JOE a Eee a a NCH 
ESSE ee } Ramana 
PeLmee Phy) be bts. oo Total Department Balances OR 
naa BeBe 
cet PEAS Te ey 
ee ce ae i ee tS ie 
ee ep ee ea cor Fe a ee 
Eis SD Be a na ed ed ee LC) 
ies Accrued Interest Payable PRERPIeOe 
PS te 
pa ran anes Fa (hice 88 Deans Chetek Wa Eo 
. ORE Cuil), el White an! Coa ae Ama ne mee colo i ET TG 
es T Lines “Nes eamenan Teno uirotin le Cn 20 
oj MSIERG Be Get PSG S eeibde ee Sateen Meanie te teen Gama bP 
© et RR 
| Cash Collections 

re | Due from Trust Deposjtories 

fl Far pO a 

3 Ss 

is CN AE Scat ameniee Deen tne cet 

ree eer 


Form 25.—Proof Sheet. 


WORK OF CORPORATE TRUST DEPARTMENTS 


V2 


AUYLELIOUR LAV.LSISSY 


"Hoey ysnIp—9z wWI0g 


‘IUOL MAN 


* en oe 
ACM aL 2a 


CRASSUS A 


Soren 


an) Sevieeeaneney nthe io AIST: ATE? 


saosin ak 


hae 


Ae S22 Seeehs 22 22 FFE EOEEOEE BOSSES EEKAAREEEEE 


“diva ne) 


4O U3GYO OL : 
4 vos | 


ey 
‘NOdNOD YOSHD 
ISNdL ALWYOdYOO 


TRUST -DEPARTMENT 


DOCUMENTS EXECUTED SLIP No. GE 600. 


TITLE OF TRUST 


DESCRIPTION OF DOCUMENTS 


PROCEEDS IF ANY, AND DISPOSITION 


EXECUTED IN __. COUNTERPARTS, 


APPROVED BY COUNSEL 


(DATE) 


BY 


VICE-PRESIDENT ASS’T SECRETARY 


THIS SLIP TO BE INITIALED BY SIGNING OFFICERS AND DELIVERED TO AUDITOR. 


Form 27.—Documents Executed Slip. 


Form Tay ape Card. 
73 


74 WORK OF CORPORATE TRUST DEPARTMENTS 


“Vault index cards” (Form 30) comprise a record of the 
location of securities of all kinds in the vaults. This informa- 
tion must be given on vault deposit and withdrawal tickets. 

While the records discussed in this chapter comprise a 
complete corporate trust accounting system, supplementary 
and special records are shown in other chapters. 


FOLLOW UP 


ACCOUNT 


DETAILS 


Form 29.—Pending Card. 


UNISSUED 


CANCEL D BONDS 


9 
SAN D COUPONS 
RITIES HELD FOR CREMATION a Shin a 


Form 30.—Vault Index. 


CHAPTER V 


THE CORPORATE MORTGAGE; PREAMBLE, 
GRANTING CLAUSE, AND FORM OF BOND 


The typical mortgage.—In this and succeeding chapters 
the discussion of the form of a corporate mortgage will gen- 
erally be based on a typical modern mortgage, hereafter re- 
ferred to as the “Telephone” mortgage, the full text of which 
appears on pages 333 to 391. A careful reading of the portion 
of the “Telephone” mortgage under discussion in each chap- 
ter will probably assist the reader to a fuller understanding 
of the subject. ‘There is, of course, no “‘standard” corporate 
mortgage—each instrument being drafted to fit the needs of 
a particular situation. However, there will be found a gen- 
eral similarity in form, and many common characteristics. As 
stated in the preface, the purpose of this discussion is to de- 
velop, chiefly, the points which are of greatest interest to those 
engaged in corporate trust administration. Consequently, 
some points of considerable legal importance, but of less prac- 
tical interest, will receive only brief mention. 


Parties and preamble.—The opening pages of a corporate 
mortgage are devoted to a number of formal statements, in- 
cluding (1) the date of the mortgage, which is not, as a rule, 
the date of actual execution; (2) the names of the mortgagor, 
the trustee, and other parties, if any, to the instrument; and 
(3) recitals as to the authority of the borrowing company, 
its purposes in creating the mortgage and the outstanding fea- 
tures of the bonds to be issued thereunder. } 


Form of bond.—Included in the recitals is the form of 
bond to be secured by the mortgage. Mr. Francis Lynde 
Stetson: has described a bond as follows: 


“Primarily, a corporate bond contains a promise to pay a 
fixed sum at a time and place specified, and to pay interest 


1Francis Lynde Stetson, “Some Legal Phases of Corporate Financing, 
Reorganization and Regulation,” p. 16. 


75 


76 WORK OF CORPORATE TRUST DEPARTMENTS 


thereon at a rate, time, and place also specified. To identify 
the bonds as entitled to the benefits of the indenture, the bonds 
set forth the amount and title of the issue, and the parties 
and date of the indenture, and refer to the indenture for a 
statement of the security (if any), and the rights of the 
trustee and of the bondholders in respect of such security or 
under such indenture. 


‘There is a recital also that certification by the trustee un- 
der the indenture is requisite to the enforceability of the bond. 
This certification then becomes as essential to the validity of 
the bonds as to the security thereof by the indenture. 


‘Such a simple bond properly executed and attested is the 
stock upon which from time to time have been grafted various 
provisions intended to make the bonds attractive to purchas- 
ers or to protect the obligor. The number and variety of 
such provisions are many, limited only by the ingenuity of the 
borrower and the necessity of avoiding any contravention of 
the promise to pay.” 


Until the comparatively modern innovation of securing 
bonds of different series by the same instrument, the full text 
of the bond was set out in the mortgage. Unless issues of 
bonds in series are contemplated, this practice is still fol- 
lowed. In the newer mortgages, providing for more than 
one series, a skeleton form is given, with the statement that 
the bonds of each series shall substantially conform thereto, 
with such alterations and insertions as may be authorized 
pursuant to the mortgage. 


Promptly upon receipt of the bonds for certification and 
delivery, the trustee should compare the text thereof with 
the form in the mortgage. No variation in substance should 
be permitted unless authorized by the mortgage. This com- 
parison should include the form of coupon, trustee’s certifi- 
cate, and any authorized legends or endorsements, as well 
as the form of the bond itself. 

In accordance with common practice, the ‘Telephone’ 
mortgage sets forth, not only the form of the coupon bonds, 
but also the form of the coupons, the fully registered bonds 
and the trustee’s certificate. 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. ‘77 


Granting clause.-—In the words of Mr. Roberts Walker 3 


“The granting clauses, the habendum and the ‘in trust, never- 
theless’ clause are fundamental. The granting clauses de- 
scribe and convey the property to be mortgaged. The 
habendum completes the conveyance; to this point the docu- 
ment would be a deed or mortgage for the sole benefit of 
the trustee. Then follows the language that transforms 
the document into a deed of trust, defining the quality in 
which the trustee receives the property as grantee, but ‘in 
trust, nevertheless’ for the bondholders, thus making the 
bondholders the real beneficiaries of the transaction. 


“In logical sequence, here should follow the passage com- 
monly entitled ‘Possession until default; Defeasance Clause,’ 
wherein it is provided that the mortgagor shall continue in 
possession of all or some of the mortgaged property until 
default is made in paying the bonds or coupons or in living 
up to other terms of the mortgage; and also that upon final 
payment and performance of the bonds and mortgage, de- 
feasance shall occur, that is, the mortgage shall be undone 
and the mortgagor shall retake the mortgaged estate as its 
sole absolute property.’ 


The mortgage may cover various classes of property— 
real estate, chattels, securities—as well as franchises, leases, 
patents, income from the mortgaged property, and so on. 
Many mortgages are intended to convey for the security of 
the bondholders, not only the property of the company, in 
existence at the date of the mortgage, but also all property 
which may come into the possession of the company, during the 
life of the mortgage. In such cases there is inserted in the 
granting clause, an “‘after-acquired property clause’’ setting 
forth the intention. Such clauses have resulted in some very 
interesting legal contests. 


Following the granting clauses it is customary to insert a 


statement of excepted property and appropriate references 
to any prior encumbrances. 


2In the “Telephone” mortgage set forth in the appendix the real property 
_conveyed was described in detail in a separate instrument which was recorded 
with the mortgage. See Article VI, Section 3 (p. 362). 
3Roberts Walker, “The Modern Corporate Mortgage.” 
4See Chapter XI, p. 159. 


78 WORK OF CORPORATE TRUST DEPARTMENTS 


Article I — the bonds.’— In the first article of a modern 
mortgage usually appear the terms of the bonds to be issued 
thereunder, the method of execution, provisions as to de- 
nominations, registration and exchange thereof, the authori- 
zation of temporary bonds, and regulations for the issuance 
of duplicate bonds, in the event that bonds become mutilated, 
destroyed, lost, or stolen. 


Authorized issues.— The total authorized amount of bonds 
is in some cases stated in the preamble and at times in this 
article. In the preamble of the ‘Telephone’ mortgage it is 
recited that the immediate issue shall be $25,000,000 of 
Series “‘A’’ bonds, but the total authorized issue is not pre- 
scribed. Article II of the ‘Telephone’ mortgage, referred 
to in the next chapter, provides that the company may issue 
bonds thereunder, without any fixed limit as to principal 
amount, but subject to certain restrictions. While such a mort- 
gage is sometimes referred to as authorizing an “unlimited” 
issue, it is more accurate, in view of the express conditions, 
to refer to the issue as “indeterminate.” 


Series of bonds.—Indeterminate bond issues are of recent 
origin, but are becoming quite common in railroad and public 
utility borrowing. The reason is, perhaps, best illustrated 
by the picture of the economical country mother who, in buy- 
ing a new suit of clothes for her growing boy, purchases one 
at least two sizes too large, so that it will not become too 
small before it has worn out. Think of her joy if it were 
possible to buy an adjustable suit. Corporations, particularly 
railroads and public utilities, like the small boy, have the 
growing habit. Before the days of the adjustable mortgage, 
their bankers and directors used to provide a mortgage author- 
izing a much larger issue than was at the moment required, 
but all too often the corporation outgrew the mortgage in a 
few years, and then had to undergo all the trouble and expense 
of securing a new and larger one. 


Adjustability— Experience has indicated the necessity of 
flexibility in respect of matters other than mere size. Nearly 
all of the old mortgages provided for a fixed rate of interest 
on the bonds to be issued. The fallacy of establishing a rigid 


5 See page 340 for Article I of the “Telephone” mortgage. 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 79 


interest rate was clearly shown in the period of high money 
rates immediately following the War. Many a corporation 
found itself confronted with the necessity of borrowing, in an 
8 per cent market, and under a mortgage authorizing only 5 
per cent bonds. 

There was a period of some years before the War when 
internationally known corporations could borrow to advan- 
tage in Europe; but the Englishman wished his bonds to be 
payable in sterling and the Frenchman in francs, and most 
corporations found that their mortgages authorized bonds 
payable only in dollars, and were consequently faced with 
much legal detail in furnishing bonds payable in the required 
currencies. 

It is because of circumstances such as these that many mort- 
gages of large corporations authorize the issue of bonds in 
series, each to be plainly designated, usually by letter or year 
of issue or maturity, so that it can easily be distinguished 
from other series under the same mortgage, and issuable on 
such terms as to interest rate, maturity, convertibility, cur- 
rency, etc., as the directors of the company may authorize 
pursuant to the terms of the mortgage. 

The form of the Series “A” coupon bond issued under the 
“Telephone Company” mortgage is reprinted, in full, below: 


Fig. 5—Form of Coupon Bond. 


United States of America. 
No. 


THE TELEPHONE COMPANY OF AMERICA 


Twenty-five year First and Refunding Mortgage 5% Sinking Fund Gold 
Bonds, Series “A” 
Due October 1, 1950 


The Telephone Company of America (hereinafter called the “Telephone 
Company’’), a corporation of the Commonwealth of Pennsylvania, for value 
received, hereby promises to pay to bearer, or, if this bond be registered, 
to the registered holder hereof, on the first day of October, 1950, at the office 
or agency of the Telephone Company in the Borough of Manhattan, City of 
New York, Dollars in gold coin of the United States of America of or 
equivalent to the standard of weight and fineness existing on October 1, 1925, 
and to pay interest thereon from the date hereof at the rate of five per cent 
(5%) per annum, without deduction for any tax imposed by the Commonwealth 
of Pennsylvania upon this bond or upon the holder as a resident thereof, not 
4m excess of four mills per annum on each dollar of the principal amount 
of this bond, such interest to be payable at such office or agency, in like gold 
coin, semiannually, on the first day of April and the first day of October 


80 WORK OF CORPORATE TRUST DEPARTMENTS 


in each year until the payment of said principal sum, but only upon the 
presentation and surrender of the interest coupons hereto annexed as they 
severally mature. 

This bond is one of a duly authorized issue of First and Refunding Mort- 
gage Gold Bonds of the Telephone Company, issued and to be issued under, 
and all equally secured by an indenture of trust, dated October 1, 1925, duly 
executed and delivered by the Telephone Company to National Trust Company, 
a corporation of the State of New York, as Trustee, to which indenture refer- 
ence is hereby made for a description of the properties and franchises mort- 
gaged, the nature and extent of the security, the rights of the holders of said 
bonds and of the Trustee in respect of such security, and the terms and 
conditions under which the bonds are issued and secured. As provided in 
said indenture, said bonds may be for various principal sums and are issuable 
in series, which different series may mature at different times, may bear inter- 
est at different rates, and may otherwise vary as in said indenture provided. 
Series “A” bonds, of which this is one, are known as the Twenty-five year 
First and Refunding Mortgage 5% Sinking Fund Gold Bonds, Series “A”, 
of the Telephone Company, and are limited in the aggregate principal amount 
of $25,000,000, at any one time outstanding. 

In case an event of default, as defined in the said indenture, shall occur, 
the principal of this bond may become and be declared due and payable in 
the manner and with the effect provided in said indenture. 

This bond shall pass by delivery unless registered as to the principal 
thereof in the holder’s name at the office-or agency of the Telephone Com- 
pany in the Borough of Manhattan, City of New York, such registry being 
noted on the bond by the agent, for such purpose, of the Telephone Company, 
after which no transfer shall be valid unless made at said office or agency 
by the registered holder in person or by his attorney duly authorized in writing, 
and similarly noted on the bond; but thereafter it may be discharged from 
registry by being transferred in like manner to bearer, and thereupon trans- 
ferability by delivery shall be restored, and may again, from time to time, 
be registered or transferred to bearer as before. Such registration, however, 
shall not affect the negotiability of the coupons hereto annexed, which shall 
continue to be payable to bearer and transferable by delivery merely, and the 
payment thereof to bearer shall fully discharge the Telephone Company in 
respect of the interest therein mentioned, whether or not this bond be registered. 

The bonds with coupons of this Series “A” are issuable in denominations of 
$1,000, $500, and $100. The registered bonds without coupons of this Series 
“A” are issuable in denominations of $1,000, $5,000, and $10,000. Such bonds 
with coupons, and such registered bonds without coupons, and such bonds of 
the several denominations of either form, are interchangeable; and in and by 
said indenture it is covenanted that upon payment of charges and otherwise 
as provided therein, any such interchange may be made by the holder of any 
such bond or bonds upon presentation thereof for the purpose at the office 
or agency to be maintained by the Telephone Company in the aforesaid 
Borough of Manhattan, City of New York. 

On any interest payment date this bond is subject to redemption at 105% 
of the principal amount thereof and accrued interest by operation of the sink- 
ing fund or at the option of the Telephone Company upon publication of 
notice of such redemption in the Borough of Manhattan, City of New York, 
as provided in said indenture, the first publication of said notice to be not less 
than sixty days prior to such redemption. 

Said indenture provides for a semiannual payment by the Telephone Com- 
pany to the Trustee of $205,000, as and for a sinking fund to be used in 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 81 


acquiring bonds of Series “A” at not exceeding 105% of their principal amount 
and accrued interest. 

No recourse shall be had for the payment of the principal of, or the interest 
upon, this bond, or for any claim based thereon, or in respect thereof, or 
of said indenture, against any incorporator, stockholder, officer, or director 
of the Telephone Company, either directly, or through the Telephone Company, 
or through a receiver or trustee, whether by virtue of any statute or rule of 
law, or by the enforcement of any assessment or penalty or otherwise, all 
such liability being, by the acceptance hereof and as part of the consideration 
for the issue hereof, expressly released. 

This bond shall not become valid or obligatory for any purpose until it 
shall have been authenticated by the execution of the certificate, hereon 
endorsed, by the Trustee under said indenture. 

In WITNESS WHEREOF, The Telephone Company of America has caused 
these presents to be signed by its President or Vice President and its corporate 
seal to be hereunto affixed and attested by its Secretary or Assistant Secretary, 
and coupons for said interest bearing the engraved facsimile signature of its 
Treasurer to be attached hereto in the City of New York. 


Dated the first day of October, 1925. 


THE TELEPHONE COMPANY OF AMERICA, 
By 


Vice President 
Attest: 


Assistant Secretary 


Form of Interest Coupon. 
No. 


$ 


On the day of (unless the bond to which this coupon is attached 
shall have been called for previous redemption), The Telephone Company 
of America will pay to bearer, without deduction for any tax imposed by the 
Commonwealth of Pennsylvania upon the bond to which this coupon is attached, 
or upon the holder as a resident thereof, not in excess of four mills per annum 
on each dollar of the principal amount of such bond, at its office or agency 
in the Borough of Manhattan, City of New York, Dollars in gold coin of 
the United States, being six months’ interest then due on its Twenty-five 
year First and Refunding Mortgage 5% Sinking Fund Gold Bond No. 
Series “A.” 


‘Treasurer. 
Form of Trustee’s Certificate. 


This bond is one of the bonds, of the series designated therein, described 
in the within-mentioned indenture. 
NATIONAL TRusT COMPANY, Trustee, 


By 
Assistant Secretary. 
(Back oF Bonp) 


The stamp tax imposed by act of Congress for and in respect of this 
bond has been paid by stamps affixed to the indenture under which this bond 
is issued, and duly canceled. 


82 WORK OF CORPORATE TRUST DEPARTMENTS 


Legend as to Stamp Tax 

(LEGEND ON $1,000 Bonps As TO EXCHANGEABILITY FOR OTHER DENOMINATIONS) 

The holder of this bond may, at his option, on surrender and cancellation 
and on payment of charges, as provided in the Indenture, receive in exchange, 
coupon bonds of the same issue and series for an amount aggregating $1,000 
in denominations of $500 or $100, of numbers not contemporaneously out- 
standing. 

Form for Registration of Principal. 


NoTicE: No WRITING ON THIS BOND EXCEPT BY AN OFFICER OR AGENT OF THE 
COMPANY 


Date of Registration| Name of Registered Owner| Signature of Registrar 


Filing Back. 


THE TELEPHONE COMPANY 
OF AMERICA 
— $1,000 
Twenty-five Year 

First and Refunding 

Mortgage 5% Gold Bonds 
Series ee 
Due October 1, 1950. 


Interest Payable 
April 1 and October 1. 


Principal and Interest 
payable in the 
Borough of Manhattan 
City of New York. 


In the case of a mortgage authorizing the issuance of bonds 
in series, the first article will usually set forth in detail the 
terms of the initial series, and provide that subsequent series 
shall be issued upon such terms, within the limits prescribed 
by the mortgage, as may be determined by the directors of 
the company, by appropriate resolution, a certified copy of 
which should be filed with the trustee with the first applica- 
tion for issue of bonds of the new series. In some cases the 
mortgage provides that the terms of each new series shall 
be set forth in a supplemental indenture. ‘This method is 
more formal, and some lawyers consider it better practice. 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 83 


Execution of bonds.—Bonds are often executed by the cor- 
poration well in advance of issuance, and to meet the contin- 
gency of an ofhcer severing his connection with the company 
prior to the date of actual issue of bonds signed by him, pro- 
vision is nearly always made that bonds so signed may be 
delivered as valid obligations of the company, and similarly, 
provision is made that bonds may be signed by officers of 
the company at the date of issue, although such persons may 
not have been officers of the company at the nominal date of 
the bonds. At this point it is also usual to authorize the ex- 
ecution of the coupons by the facsimile signature of the pres- 
ent or any future treasurer of the company. The reasons 
for these provisions are obvious. 

It is customary also to provide that all coupon bonds, irre- 
spective of the date of issue, shall be dated as of the date of 
the mortgage, and that all matured coupons at the time of 
issue shall be detached by the trustee and canceled. If the 
mortgage authorizes fully registered bonds, such bonds are 
usually dated as of the interest date next preceding the date 
of issue, unless issued on an interest date when the bonds 
are dated as of the date of issue. 


Trustee’s certificate.— That the trustee’s authentication or 
‘certification’ of a bond is essential to its validity is recited 
not only in the bond itself (see page 81), but in the mort- 
gage as well. Authentication by the trustee identifies the 
bonds regularly issued under the mortgage. Unfortunately, 
investors have sometimes assumed that the trustee’s signature 
on a bond implied some guaranty of value. The mere read- 
ing of the trustee’s certificate (which generally takes the 
form set forth on page 81) should correct any such im- 
pression. 


Registration, transfer, and exchange.°— Practically all bond 
issues provide for registration as to principal, and many long- 
term bonds for full registration. Registration ‘‘as to prin- 
cipal only” is endorsed upon the coupon bonds, in a space 
provided for that purpose as indicated on page 82. Such 
registration does not affect the interest and the coupons con- 
tinue to be payable to bearer. ‘The owner’s name is inscribed 


6 The operation of transfer and registration of bonds is discussed in Chap- 
ter XVIII. See page — for the provisions of the “Telephone” mortgage. 


84 WORK OF CORPORATE TRUST DEPARTMENTS 


on the bond and entered upon the registration record by the 
company or its authorized bond registrar, usually the institu- 
tion which acts as trustee; in fact, many mortgages designate 
the trustee as bond registrar. Subsequent transfers are made 
on the books of the company and endorsed upon the bond by 
the registrar upon presentation to it of the bond accompanied 
by a proper assignment executed by the registered owner. 
Registered bonds of this type may be restored to their original 
bearer form by transfer to “bearer” instead of to a new 
registered holder, and may again, from time to time, be regis- 
tered and retransferred to bearer. 

Full registration, that is, registration of both principal and 
interest, is accomplished in a different manner. Some of the 
older mortgages provide that in case of full registration the 
coupons shall be detached and canceled, and the bond endorsed 
as in the case of registration as to principal. Under most 
mortgages, which provide for full registration, however, sepa- 
rate forms of fully registered bonds are authorized, in speci- 
fied denominations, and upon surrender of a block of coupon 
bonds for full registration, the coupon bonds are canceled 
and in lieu thereof fully registered bonds in the name of the 
new owner are certified and delivered. As interest falls due, 
checks for the interest on fully registered bonds are mailed 
to the registered holder by the company or its agent. 

In many cases fully registered bonds carry a legend to the 
effect that they have been issued against the cancellation of 
coupon bonds of specified serial numbers and denomination 
and that the specified coupon bonds will be reissued, on appli- 
cation of the registered holder and on surrender and can- 
cellation of the fully registered bond. ‘This is considered 
good practice and is a listing requirement of the New York 
Stock Exchange as to registered bonds which are interchange- 
able with coupon bonds.’ 


Exchange of denominations.—Many mortgages which pro- 
vide for coupon bonds in denominations other than $1,000 
(usually $500 and $100) authorize the exchange of one de- 
nomination for another. Some mortgages restrict this privi- 
lege to the consolidation of small denominations into larger, 
while others permit a full exchange either way. Similarly, 


7 See listing requirements of New York Stock Exchange, page 441. 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 85 


in the case of fully registered bonds of specified denomina- 
tions, provision is made that bonds of one denomination may 
be exchanged for other denominations. In the case of fully 
registered bonds, the usual denominations are $1,000, $5,000, 
and $10,000, although sometimes blank certificates are used 
_which may be issued for any multiple of $1,000. Fully regis- 
tered bonds of less than $1,000 are rarely authorized. 


Charges for registration and exchange.— Mortgages which 
authorize fully registered bonds and the exchange of denom- 
inations usually provide that the company may charge the 
bondholder for any registration, transfer, or exchange involv- 
ing the issue of a new bond, a specified sum (seldom in excess 
of $2) for each new bond issued, plus reimbursement for any 
tax imposed on the transaction. 


Who is deemed owner.—For the protection of the com- 
pany and the trustee, the statement that the company and the 
trustee may treat the bearer of any unregistered coupon bond, 
and of any coupon, and the registered holder of any registered 
bond, as the absolute owner thereof, and shall not be affected 
by any notice to the contrary, is practically always made in 
the mortgage. While this provision is inserted for the pro- 
tection of the company and the trustee, too much reliance 
should not be placed upon it, as there may be circumstances 
in which neither the company nor the trustee could legally 
disregard other notice. 


Duplicate bonds.—The volume of securities lost and stolen 
during the past few years is a matter of concern to trustees 
which are called upon to certify duplicates. Practically all 
corporate mortgages make provision for replacing bonds 
which have been mutilated, destroyed, or lost. Section 7 of 
Article I of the ‘Telephone’ mortgage is typical of the re- 
quirements for the issuance of duplicates. Some recent mort- 
gages specifically permit the issuance of duplicates of stolen 
bonds. Where specific authority is lacking, the trustee will 
do well to secure counsel’s opinion as to whether the word 
“lost,” as used in the mortgage, embraces the meaning of the 
word “stolen.” 


Immediately upon receiving a report of the loss or theft 
of securities the trustee should make appropriate notation in 


86 WORK OF CORPORATE TRUST DEPARTMENTS 


the different accounts pertaining to the securities, such as 
exchange, bond registration, coupon paying records, etc., and 
should also record the notice in a central “stop” file. As 
securities are recovered or duplicates issued supplemental no- 
tations should be made on the same records. 


It is hardly safe to generalize on the subject of the issuance ~ 
of duplicate bonds, because in each case the surrounding cir- 
cumstances have an important bearing, but the trustee should 
proceed with caution and, before acting upon any application 
for the issuance of a duplicate of a bond reported lost, stolen, 
or destroyed, should carefully consider these questions: 


1. Does the mortgage permit the issuance of a duplicate? 

2. Has acceptable indemnity (usually for (a) twice the 
face amount of the bond plus (b) the amount of interest to 
maturity) been furnished the company and the trustee? 

3. Has the applicant established his ownership and filed 
satisfactory proof of loss, theft, or destruction? 

4. Has the mortgagor duly authorized the issuance of 
the duplicate? 

5. Has a thorough examination been made of the com- 
pany’s and the trustee’s records and securities for any trace 
of the missing bond or the coupons pertaining thereto? 

6. Have the paying agents, sinking fund agents, and the 
registrar, if other than the trustee, been apprised of the loss, 
and have they completed the examination of their records 
and securities? 

7. Have counsel examined the application and approved 
the issuance of a duplicate? 

The payment of missing bonds or coupons at maturity 
involves practically the same questions as the issuance of a 
duplicate. ‘The circumstances surrounding each case will, of 
course, determine the extent of the trustee’s investigation. 

It is advisable for the trustee to require at least six months, 
preferably twelve months, to elapse before taking final action 
on any such applications. At the end of that period, the 
investigation should be brought down to date and the case 
again examined from all angles. 

It is desirable from the standpoint of a trustee that dupli- 
cate bonds and all coupons attached thereto be identified by 
some mark which will distinguish them from the original 
bonds. However, before marking duplicate bonds, the trus- 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 87 


tee should ascertain the requirements of any stock exchange 
on which the bonds are listed. 

A special committee of the Corporate Fiduciaries Asso- 
ciation of New York City rendered a report on the subject 
of duplicate securities and submitted for the benefit of its 
members forms of letters to be used by trustees in acknowl- 
edging receipt of notice of loss or theft of securities. In such 
acknowledgment, notice is served on the bondholder or his 
representative as follows: 


“Your attention is directed to the fact that these securities 
are or may be negotiable and enforceable in the hands of an 
innocent holder for value. For this reason, we are regret- 
fully constrained to advise that we can assume no respon- 
sibility in respect of any payment, exchange, or transfer made 
to or at the request of any holder... . 


‘Notice of the alleged loss should first be filed with the 
debtor company at and its consent to the issuance of 
duplicate securities should be lodged with us, and our prac- 
tice is to require, in substantially the form enclosed (a) proof 
of loss, theft, or destruction, and (b) a bond of indemnity 
issued by one of the standard surety companies in an amount 
equal to: (1)twice the par value of the securities; (2) interest 
foumaturitys <7. 


It is advisable in all cases to have the bond of indemnity 
executed by a reputable surety company, in form approved 
by the trustee’s counsel and so drafted that the trustee will 
receive all possible protection. 

Certainly, in matters of this kind, where one misstep may 
result in serious loss, the trustee is fully justified in pressing 
its demands. At best, the certification of a duplicate bond, 
or the payment of securities alleged to have been lost, stolen, 
er destroyed, means an increase in contingent liabilities which 
the trustee should incur only when protected to the fullest 
extent possible. 


Certificates of indebtedness.—The courts of New York® 
have held that, where the provisions of a mortgage do not 


8 The outstanding New York case is Switzerland General Insurance Com- 
pany of Zurich v. New York Central and Hudson River Railroad Company, 
152 N. Y. App. Div. 70. 


88 WORK OF CORPORATE TRUST DEPARTMENTS 


entitle the owner of a lost bond to secure a duplicate bond, 
he may require the issuance by the debtor corporation of a 
“certificate of indebtedness” conforming to the lost bond in 
principal amount, rate of interest, and so on, but containing 
a provision that in case the lost bond is found in the posses- 
sion of one entitled to enforce it the certificate of indebtedness 
shall be unenforceable and void. Before certifying a certifi- 
cate of indebtedness against a lost bond, a trustee should re- 
ceive proof of loss and adequate indemnity, and generally it 
should follow the procedure outlined for the issuance of a 
duplicate bond. 


Temporary bonds and interim certificates.— Io assure a 
maximum of protection against forgery most permanent or 
‘‘definitive” bonds are elaborately engraved or lithographed, 
in fact, the New York Stock Exchange insists that as a pre- 
requisite to listing, such securities be engraved. Many corpo- 
rations which do not contemplate an immediate listing, antici- 
pate the possibilities of future requirements to the extent of 
preparing their securities in form approved by the exchanges 
of the leading security markets. But the engraving of an 
issue of some thousands of bonds and appurtenant coupons 
is a slow process, and pending such preparation it is often 
necessary for the borrowing corporation to arrange for some 
substitute acceptable to investors. 


This accounts for the use of temporary bonds and interim 
certificates. “[emporary bonds follow the general form pro- 
vided in the mortgage, and are subject to the same conditions 
as the definitive bonds for which they will, at a later date, be 
exchanged. As a rule, they carry no coupons, although a 
coupon or coupons may be attached to cover interest which 
will mature prior to the probable date of exchange for defini- 
tive bonds. ‘Temporary bonds are usually printed on engraved 
or lithographed forms, are plainly marked ‘‘temporary,” and, 
when interest coupons are not attached, provide that interest 
payments shall be endorsed on the bond. 

Interim certificates and interim receipts serve the same pur- 
pose in the security market as temporary bonds. However, 
their form is quite different and their issue is not controlled 
by the mortgage, but usually is provided for in a separate 
agreement or letter of instructions. Issued on behalf of the 


THE CORPORATE MORTGAGE; PREAMBLE, ETC. 89 


borrowing corporation or an underwriting syndicate, in many 
cases prior to the execution of the mortgage, they usually 
entitle the holder to receive the actual security when, as, and 
if issued, or, failing delivery thereof within a specified time, 
to receive a cash refund based on the subscription price of the 
bonds. Banks and trust companies frequently act as agents 
for the issuance of interim certificates.” ‘The practice of the 
underwriting house issuing its own interim receipts, where 
the underwriting house retains the proceeds of the securities 
sold, is not sound. ‘The proceeds thus held may, in bank- 
ruptcy or insolvency proceedings, be held to have become 
mingled with the other assets of the underwriting house, thus 
occasioning losses to the holders of the interim receipts. Cer- 
tain underwriting houses make a separate trust deposit of 
such proceeds with a banking institution, the underwriting 
house then issuing its interim receipts, registered by the bank- 
ing institution. This is a sound and desirable practice, where 
it results in a complete segregation of these proceeds for the 
sole protection of the holders of the interim receipts. As 
the investing public comes to better understand the principles 
and risks involved, it is likely that the receipts issued or 
registered by fiduciary institutions will be demanded. 


Exchange of temporary for definitive bonds.— The delivery 
of definitive bonds against the surrender of interim receipts 
or temporary bonds is a phase of the trustee’s activities 
which requires a system calculated to provide speed with a 
careful check of the securities received and delivered so as to 
prevent any overissue. As most large issues are marketed in 
temporary form and later exchanged, this feature of the 
trustee’s activities results in a large turnover of securities. 


Issuance before recording.—Most mortgages permit bonds 
to be certified and delivered by the trustee in advance of the 
recording of the mortgage. This is due to the time required 
to place a mortgage of record in a number of jurisdictions. 
While the authors know of no loss to bondholders because of 
this provision, the authority to deliver bonds before recording 
the mortgage is justified only on the score of practicability. 
Bankers underwriting an issue are willing to extend the 
privilege only to companies of unquestioned standing. 


9 See Chapter XIII, page 170. 


CHAPTER VI 


ISSUE OF BONDS UNDER CORPORATE 
MORTGAGES 


Trustee’s responsibility in certifying.— The provisions of a 
corporate mortgage which control the issuance of bonds are 
of special importance to the trustee, whose duty it is to see 
that issues for specified purposes, as well as the total issue, 
are kept within prescribed limits. Corporate mortgages fre- 
quently contain provisions limiting the issuance of bonds under 
the mortgage not only in the aggregate amount but in the 
amount that may be used for specified purposes. For ex- 
ample, the total issue for which a mortgage provides—the 
so-called ‘authorized’? amount—may be $5,000,000, but not 
more than $1,000,000 may be used for retiring underlying 
bonds. The trustee, then, must certify not more than 
$1,000,000 of bonds for refunding purposes. The research 
sleet (see page 100) is useful in checking the limitation just 
discussed and other points which the trustee should watch 
when called upon to certify bonds. 

In the simpler forms of instruments one paragraph, or even 
a single sentence, may suffice to express the bond issue provi- 
sions. [he purpose, in such instances, is merely to provide 
immediate cash for a known requirement, and generally no 
restrictions are imposed other than a limitation on the total 


1A variety of terms are applied to mortgages to indicate the relationship 
of the amount of bonds issued to the “authorized” issue. While these terms 
are not altogether standard, the following conform to general usage: When 
bonds are issued to the extent authorized, the mortgage is sometimes re- 
ferred to as a “closed” mortgage. If the “authorized” amount is specified in 
the mortgage, but bond issues have not reached the authorized limit, we 
speak of the mortgage as a “limited open end” mortgage. In cases where the 
mortgage sets no limit upon the amount of bonds which may be issued, or 
the authorized amount cannot be determined from the mortgage itself — being 
dependent upon some other factor, such as the amount of outstanding stock — 
we refer to it as an “open” or “indeterminate” mortgage. A company may 
also “close” a mortgage by making a formal agreement to issue no more 
bonds thereunder. A covenant to this effect is often contained in a subsequent 
mortgage. 


90 


BOND ISSUE UNDER CORPORATE MORTGAGES 91 


issue. Ordinarily, in such cases, the bonds are issuable imme- 
diately upon execution of the indenture, or, from time to time 
thereafter, upon the written order of designated officers of 


the company, or in accordance with resolutions of its board 
of directors. 


Three principal purposes of bond issue—The more elabo- 
rate regulations in respect to bond issues have come from a 
realization of the advisability of providing for future financ- 
ing by the borrowing corporation, whose requirements cannot 
be forecast at the time the mortgage is made. As a result, 
the sections of a mortgage placed under the heading, ‘‘Issue 


of Bonds,’”* are frequently drawn to provide for three main 
objects: 


1. The initial issue for immediate needs. 
2. Issuance to refund underlying bonds. 
3. Issuance for permanent additions and betterments.° 


The initial issue—Bonds for immediate requirements are 
usually deliverable upon a simple order of designated officers 
of the company or pursuant to resolutions of its board of 
directors. An initial bond issue will probably have as its 
purpose one or more of the following: 


Reimbursement for capital expenditures actually made by 
the company prior to the date of the mortgage. In such a 
case the trustee usually has no obligation other than to deliver 
the bonds; but the section authorizing the issue of bonds 
against subsequent capital expenditures will then provide that 
only expenditures made after the date of the mortgage may 
be the basis of additional bond issues. 


Acquisition of property included in the granting clauses 
of the mortgage. Such an issue requires a so-called “clearing 
transaction” at the time of the execution of the mortgage. 
Representatives of the company, its bankers, the trustee, and 
thé seller of the property meet and go through a “simulta- 
neous” procedure, of which the following is an example: 


1. The company receives a deed from the seller of the 
property. 


2 This reference is to the text of the “Telephone” mortgage, page 345. 
3 Sometimes the term “capital expenditures” is used. The mortgage should 
always clearly state what items are admissible under this general heading. 


92 WORK OF CORPORATE TRUST DEPARTMENTS 


2. The company and the trustee execute the mortgage. 

3. The trustee delivers the bonds (previously signed and 
certified) to the company. 

4. The company delivers the bonds to its bankers, against 
payment. 

5. The company pays the seller for the property. 

6. The deed, together with the mortgage, is delivered to 
a joint representative of the interested parties to be promptly 
recorded. 

The mortgage must, of course, contain the customary pro- 
vision permitting delivery of bonds in advance of actual re- 
cording. 


Acquisition of securities to be pledged with the trustee. 
This may involve a ‘“‘clearing transaction” similar to that de- 
scribed for the acquisition of real property. The question of 
the control of pledged securities is discussed in Chapter IX. 


Pending construction.—At times a mortgage contemplates 
financing, through the proceeds of the initial issue, the con- 
struction of a new factory, power-house, line of railway, or 
some other project. In that event, the mortgage will usually 
provide that the cash proceeds of the bonds shall be deposited 
with the trustee for the purpose of paying for the construction 
as it progresses. [he requirements for the withdrawal of 
such cash are similar to those prescribed for the issue of bonds 
against capital expenditures. (See page 93.) 


Refunding.—Several methods are used to accomplish the 
refunding of underlying obligations. In case the mortgage 
authorizes the issuance of bonds against underlying obligations 
before the maturity of the latter, the company may indepen- 
dently acquire the underlying obligations and deliver them to 
the trustee with its formal application for the issue of addi- 
tional refunding bonds. Issues for the purpose of redeeming 
underlying bonds are not quite so simple, because the refund- 
ing mortgage generally requires the trustee to receive evidence 
that the proposed redemption will be accomplished. This will 
probably include evidence that the company has complied 
with the provisions of the underlying mortgage as to publi- 
cation and mailing of the redemption notice and that it has 
provided the cash necessary to effect the redemption. Ordi- 
narily these funds are secured through the sale of refunding 


BOND ISSUE UNDER CORPORATE MORTGAGES 93 


bonds and the cash is held in trust by the refunding trustee, 
until deposit with the underlying trustee is necessary to accom- 
plish the redemption. ‘The deposit is then made by the re- 
funding trustee, in trust, for the express purpose of the re- 
demption. ‘The refunding of underlying bonds at maturity 
may consist simply of the delivery of the new bonds upon 
receipt by the trustee of the canceled underlying bonds accom- 
panied by an appropriate application of the company under 
the provisions of the refunding mortgage; or the operation 
may involve the issuance of the refunding bonds upon deposit 
with the trustee of cash sufhiicient to pay the maturing under- 
lying bonds, this cash to be released as the matured bonds 
are received. Canceled underlying bonds received by a trustee 
as a result of their payment or redemption constitute prima 
facie evidence of a reduction of the underlying lien. Further 
than this their value is problematical. As a rule, uncanceled 
underlying bonds so received are held alive and, generally 
speaking, such bonds are enforceable in case of default, thereby 
entitling the trustee to a proportionate share in the underlying 
lien. As to coupons from underlying bonds deposited with the 
underlying trustee, it is customary to provide that they shall 
not be enforceable against the company unless a default exists. 
It is sometimes provided that underlying bonds shall be 
stamped by the trustee “Not negotiable, held by the trustee 
under mortgage,” or words to that effect. 

The trustee of a refunding mortgage is practically always 
authorized, when it has acquired all bonds of an underlying 
issue, to cancel the entire issue and secure from the underlying 
trustee an instrument of satisfaction and release. However, 
if there is an intervening lien, such underlying issue will be 
held by the refunding trustee, until the intervening lien has 
Been satisfied. 


Issues for permanent additions and betterments.—At the 
time the mortgage is drawn, the company will usually en- 
deavor to make these provisions as broad as possible, while 
the bankers will insist upon such restrictions as in their judg- 
ment are necessary to protect the bondholders. The careful 
trustee, in examining such a mortgage, prior to execution, 
will satisfy itself, first, that the necessarily complicated pro- 
visions are entirely clear, so that no embarrassing questions 


94 WORK OF CORPORATE TRUST DEPARTMENTS 


of interpretation will arise during the administration of the 
trust, and, second, that the provisions and restrictions, as 
stated, are practicable. Counsel for the trustee will, of course, 
pass upon the legal questions involved. 


General restrictions.—Perhaps the best way to give a gen- 
eral idea of the character of restrictions which mortgages 
generally place against the issuance of bonds for refunding 


purposes and for capital expenditures is to cite a few typical 
provisions: 


No default——Bonds may not be issued while a default 
exists. 


Percentage of cost.—Bonds are usually issuable only to an 
amount equal to a specified percentage, say, 75 per cent or 
80 per cent, of the actual cost or fair value to the company, 
whichever shall be lower, of the property or betterments. 
The percentage restriction, however, is not usually applied to 
refunding operations. 


Character of additions—The mortgagor is usually re- 
quired to certify that the expenditures are properly chargeable 
to capital, that they have been made on property subject to 
the lien of the mortgage, and that such additions and better- 


ments are necessary and advantageous to the business of the 
company. 


New property.—If new property is involved, there is usu- 
ally a further requirement that such property be subjected to 
the lien of the mortgage simultaneously with the issuance of 
the bonds. ‘There may also be special restrictions on the char- 
acter of property which may be made the basis of bond issue, 
for instance, a railroad mortgage may require new property 
to connect with the existing right of way, or a public utility 
mortgage may restrict the company’s pledge of property as a 
basis for bond issues to property required in connection with 
the company’s business and located in territory served by the 
company or adjacent thereto. 

Practically every mortgage of this kind requires that the 
property which is the basis of the application shall be free of 
any lien superior to the lien of the mortgage under which the 
bonds are issuable, or, if there are any prior liens, that ade- 
quate provision be made to take up such liens. 


BOND ISSUE UNDER CORPORATE MORTGAGES 95 


Earnings.—Provisions as to net earnings, as a prerequisite 
to bond issue, are contained in many mortgages. A typical 
requirement is that the net earnings for 12 consecutive months 
within 15 months next preceding the application shall equal 
twice (the ratio varies from 1% to 2 times) the total interest 
requirements for the same period on all obligations with a lien 
equal, or prior, to that of the mortgage, and including the 
interest on the bonds applied for. 


Evidence of compliance with restrictions.—Every mort- 
gage will specify certain documents which shall be filed with 
the trustee on each application for the issue of bonds, as evi- 
dence of compliance by the mortgagor with the requirements 
of its mortgage. The following outline of the documents 
comprising a typical bond application illustrates the general 
practice: 

1. Resolution.—Practically every mortgage requires that 
the application shall include a certified copy of resolutions 
passed by the directors of the mortgagor, authorizing the 
application and generally stating the purpose of the proposed 
bond issue. 


2. Order.—Most mortgages require a written order by 
specified officers directing the delivery of bonds. 


3. Certificates—The different mortgages present a rather 
wide range in their requirements as to certificates covering 
the detail of the basis of the application. Nearly every mort- 
gage will require a certificate as to the facts by one or more 
designated officers of the company, for instance, by the presi- 
dent or a vice president and by the treasurer or chief account- 
ing oficer. Under many mortgages it is required that such 
certificates take the form of affidavits by the subscribing off- 
cers. he certificates of disinterested engineers or other ex- 
perts selected by the company and approved by the trustee 
are frequently required in support of the statements by the 
company in its application. Ordinarily, it is required that such 
afidavits or certificates shall describe the betterments and 
additions in reasonable detail, and shall certify to their 
cost or value, and also to their utility or necessity with respect 
to the mortgagor’s business. A good rule for a trustee to 
follow on the question of ‘reasonable detail’ is to insist upon 
a description sufficiently broad to enable the trustee, in case 


96 WORK OF CORPORATE TRUST DEPARTMENTS 


of default and foreclosure, readily to identify the property 
subject to its mortgage. 


4. Opinion of counsel.—lIt is usual to require an opinion 
of counsel that the expenditures certified in the application 
are of a nature authorized by the mortgage, that the company 
has good title to the new property, if any, covered by the 
application, and that the property or betterments and improve- 
ments are, or, upon the issue of the bonds or payment of 
cash representing bond proceeds, will become subject to the 
lien of the mortgage, without prior lien, or, if a prior lien 
exists upon any such property, that adequate provision has 
been made to discharge such prior lien. Some mortgages 
require the opinion of independent counsel, but this is the 
exception rather than the rule. In many instances a supple- 
mental indenture is necessary to extend the lien of the mort- 
gage to new property, and it is usual for a mortgage to require 
the opinion to state whether a supplemental indenture is neces- 
sary, and, if necessary, to approve the form thereof and to 
specify the proper recording. 

5. Earnings statement.—Any mortgage which requires a 
specified ratio between net earnings and interest payable will 
provide for an earnings statement as a part of a bond appli- 
cation. ‘The general practice is to permit the certification of 
such a statement by the treasurer or an assistant treasurer 
of the company, but some mortgages will require certification 
by public accountants selected by the company and approved 
by the trustee. 


6. Balance sheet-—Some mortgages, particularly those 
which contain a covenant with respect to net quick assets, 
will require a balance sheet. WHere, again, the general rule 
is for certification by the treasurer or assistant treasurer of 
the company, although in exceptional cases the requirement is 
for a public accountant’s certificate. 


In addition to the requirements discussed above, some 
mortgages contain one or more general restrictions on the 
issue of bonds, such as a provision that the total amount of 
the mortgagor’s outstanding bonded debt shall never exceed 
the amount of its outstanding capital stock. The first para- 
graph of Section 1, Article II, of the ‘“Telephone” mortgage 
(page 345) is an example of such a provision. 


BOND ISSUE UNDER CORPORATE MORTGAGES 97 


Issuance of bonds against cash—_ Many mortgages permit 
the company to take advantage of favorable bond markets by 
providing that the trustee may deliver bonds against the de- 
posit of cash equal to the principal of the bonds so delivered. 
As a rule, a limit is placed on the amount of cash representing 
the proceeds of such bonds which may be held under the 
mortgage at one time. ‘The restriction is to obviate the pos- 
sibility of the company relying on its judgment of conditions 
in the bond market to the extent of selling in advance an 
unreasonably large block of its bonds. The company, of 
course, is required to pay the full interest rate on the bonds 
which it sells, while the cash proceeds, so long as they remain 
under the mortgage, must necessarily return a much smaller 
yield. The loss from a transaction of this kind carried to 
extreme might easily have a serious effect on the net earnings 
of the company. 

It is just this situation which produces a rather serious 
problem for the trustee. The company, considering on the 
one hand, the rate of interest which it is paying on its bonds, 
say 6 per cent, and, on the other hand, the rate of interest 
it is receiving from the trustee, usually from 2 per cent to 3 
per cent, on some millions of dollars of proceeds of bonds 
awaiting withdrawal pursuant to the mortgage, often, and 
quite naturally, considers ways of investing the funds more 
profitably. As a consequence, it comes to the trustee with 
various proposals for the temporary investment of the 
fund. Unless the mortgage makes express provision for this 
situation, any such investment is at the risk of the trustee 
and may constitute a breach of trust. Furthermore, the intent 
of the mortgage is that there shall be one hundred cents on the 
dollar of principal to cover the future capital expenditures 
of the company or to protect the bondholders in the event 
of a prior default by the company, and the bondholders are 
not directly interested in the income produced by the fund. 
Consequently, the trustee should refuse to make such invest- 
ment unless authorized by the mortgage or unless extraordi- 
nary conditions exist. 

The tendency in drawing mortgages, particularly since the 
World War, is to authorize the investment of such funds, 
usually in the short-term obligations of the Federal govern- 
ment. In cases where specific authority is contained in the 


98 WORK OF CORPORATE TRUST DEPARTMENTS 


mortgage, the trustee is protected in making investments 
of this type which conform to the requirements of the 
mortgage. In drawing such provisions in a mortgage, how- 
ever, it is not considered good policy to widen the field beyond 
the short-term Federal obligations. “There are many other 
safe investments which might be considered acceptable, such 
as Liberty Loan bonds and the stronger municipal issues; 
but the prices of all except the very short-term investments 
fluctuate with the major swings of the money market. Con- 
sequently, although the long-term investment may be exactly 
as sound on the day the funds are required as on the day it 
was purchased, the difference in market price may, particularly 
in the case of a large fund, result in serious loss to the trust 
estate. A very good practice, even in the case of authorized. 
investments in short-term Federal obligations, is to purchase 
maturities, conforming as nearly as may be with a budget 
prepared by the company of the anticipated dates and amounts 
of its expenditures. 


Another perplexing question is involved in the request, at 
times presented to the trustee under a mortgage authorizing 
the issue of bonds against cash, to deposit all or a part of the 
cash fund with other depositaries. Here} again, the provi- 
sions of the mortgage are, or at least should be, controlling. 
If specific authority is given, the trustee is protected in acting 
in accordance therewith. If the mortgage does not contain 
authority some degree of risk attaches to the trustee, even 
though careful selection of depositaries may render this risk 
remote. 4 


Authority from public body.—The Interstate Commerce 
Commission has jurisdiction over practically all capital issues 
by interstate railroads, and the various states have established 
commissions or other public bodies to control security 
issues by special classes of corporations, or, in some cases, 
all corporations, within their respective jurisdictions. Some 
mortgages require that all necessary consents or approvals 
from any public body having jurisdiction over a bond issue 
shall form a part of the company’s application. But irrespec- 
tive of the provisions of a mortgage the trustee, for its own 
protection, should receive duly certified copies of all such 
consents which counsel may advise are required by law. 


BOND ISSUE UNDER CORPORATE MORTGAGES 99 


Receipts and counsel’s approval.—It is of the utmost im- 
portance that in the case of each bond issue the trustee shall 
take a formal receipt completely describing, by title, maturity, 
denomination, serial numbers, and coupons attached, the de- 
livery of bonds. Each receipt should be carefully filed, pref- 
erably with the documents constituting the corresponding bond 
issue application. 


The trustee’s responsibility for any unauthorized or over- 
issue of bonds is so clear that good practice dictates the invari- 
able rule that each bond application, in addition to careful 
examination by the trust department, should be submitted to 
counsel for approval, and counsel’s approving opinion should 
also be filed with the documents comprising the application. 


Scope of the trustee’s examination.—The research sheet, 
illustrated in Form 31, is used as a guide for the corporate 
trust department in checking bond applications. It presents 
a rather complete list of the matters which the trustee must 
consider prior to approving an application for the issuance 
of bonds. 

The calculation in the heading necessitates checking the 
amounts of bonds authorized and issued, not only under the 
mortgage as whole but under the section or sections involved 
in the application. An overissue under a particular section 
would be only less serious than an overissue in the total 
authorized amount. 


Most of the items on the research sheet have already been 
discussed. Regarding the present U. S. documentary tax 
of 5c per $100 of bonds issued, which must be paid by the 
corporation, it is good practice, approved by the Treasury 
Department, to cancel and aflix the proper amount of stamps 
to an original counterpart of the mortgage. It is then neces- 
sary that an appropriate endorsement appear on the bonds 
reading somewhat as follows: 


“Federal stamp tax imposed on the issue hereof has been 
paid, stamps having been attached to the Indenture herein 
mentioned and canceled.”’ 


If, at the time of issue of temporary bonds, one or more 
interest payment dates have elapsed, it is proper to stamp 
such bonds with a notation reading: 


100 WORK OF CORPORATE TRUST DEPARTMENTS 


“Tnterest on this bond accrues from ———”’ 


inserting in the blank space the interest payment date, next 
preceding the date of issue. 

The questions regarding consents (other than by public 
bodies, previously discussed) pertain only to a few mortgages, 
usually those on the property of reorganized companies. 
Such mortgages sometimes require the consent of certain 


F. 1111-3-24 
RESEARCH SHEET 
Date Trust 
Issue of $ of under Article Section 
Authorized Issue under Indenture $ under this Section $ 
x « “ : 


Total Issue to Date, under Indenture 
(including this Issue.) 


Balance Unissued under Indenture 


Indenture Recorded? 


Mortgage Tax Paid? q 
U.S. Documentary Tax Paid? 


Tax Legend Required on Bonds? 


“ co) 
& 
” a 


REMARKS 


Approval! Required by Public Bodies? 


Certified Copies of Approvals Filed? 


Interest Notation Required on Bonds? 


Past Due Coupons Detached & Cancelled? 
(Note disposition) 


Consents Required of: 


Bondholders or Finance Committees? 
Other Trustee? He 08 (Daa 


- Signatures on Bonds Verified? 


Collateral or Cash to be Received? 


Approval by Counsel? _ 
Are mathematical calculations on eppli- 
calcula 


cation correct? All figuring re 
tions to appear on back hereof. 
Credit Balance Carried Forward . 


(Cash or Expenditures) 


| 


Prepared by Approved by 


Form 31.—Research Sheet. 


BOND ISSUE UNDER CORPORATE MORTGAGES 101 


committees, or perhaps the company’s bankers. In other cases, 
the trustee of some junior mortgage may have served notice 
that a covenant in the junior mortgage restricts further bond 
issues under the senior mortgage or requires that consent 
to any such issue be secured from the junior trustee. 

Upon completion, the research sheet is signed by a member 
of the department, attached to the papers comprising the bond 
issue application and the entire file is submitted to an officer 
for approval. When approved the papers are placed in the 
document folder. 


CHAPTER VII 
COVENANTS OF THE MORTGAGOR 


Reason for covenants.—At the time a mortgage is drafted 
the sections concerning the covenants or agreements of the 
mortgagor receive most deliberate consideration on the part 
of the bankers who have purchased the bonds. It is obvious 
that no company would gratuitously insert burdensome pro- 
visions in its mortgage; hence, it may be assumed that the 
covenants therein expressed are the result of the bankers’ re- 
quirements in this respect. The provisions contained in the 
article entitled, “Covenants of the Company.’’* are, conse- 
quently, a fairly reliable barometer of the strength of the 
mortgagor as judged by the bankers at the time of the execu- 
tion of the mortgage. Strict covenants are intended to pro- 
tect the bondholders against existing or potential weaknesses 
in the company’s assets, financial position, or organization. 
On the other hand, lenient provisions imply that the company’s 
position, management, and prospects have satisfied the bank- 
ers that further assurances in the mortgage are unnecessary. 


Trustee’s interest in covenants.—The scope and substance 
of the covenants will depend upon the circumstances under 
which the mortgage is made. The trustee, while not involved 
in the adequacy of the covenants, should make it a point to 
examine them carefully when reading the draft of a mortgage, 
so as to assure itself that the covenants are satisfactory from 
the standpoint of administration of the trust and that they 
impose no duty upon the trustee which it is unwilling to accept. 
Various types of covenants of the mortgagor are found in 
corporate mortgages. Some of these are merely formal “re- 
statements of obvious obligations” expressed in practically 
all mortgages in more or less the same language. Other 
covenants attempt to regulate the conduct of the mortgagor 
by providing what it shall or shall not do. 


1See Article VI of the typical mortgage, p. 362. 


102 


COVENANTS OF THE MORTGAGOR 103 


“Formal” covenants.—Among the so-called “‘formal’’ cove- 
nants, are the following: 


To pay as they mature the principal and interest on the 
obligations issued under the mortgage. 

To keep an office or agency, in a specified city, where notices 
and demands under the mortgage may be served on the com- 
pany. 

That the mortgagor has good title to the property mort- 
gaged, and that it will, at its expense, warrant and defend its 
title. 

To furnish to the trustee, upon its reasonable demand, 
such further assurances as to title as may be necessary or 
desirable. 

That the mortgagor will not do, or permit to be done, 
anything which would impair the lien of the mortgage. 

To pay all taxes and other claims against the company, 
which if unpaid might become a lien upon the mortgaged 
property prior to the lien of the mortgage. In this section, 
however, it is usually provided that the company shall not 

“be obligated to pay any such claim so long as it shall in good 
faith contest the validity thereof, and so long as, in the judg- 
ment of the trustee, the security afforded by the mortgage 
shall not be materially endangered by the contest. 

That no lien on the mortgaged property shall be created 
which would be prior to the lien of the mortgage. 

To maintain its corporate life and right to do business. 

To properly record the mortgage and to pay any fees and 
expenses incident thereto. 

To keep the mortgaged property in repair and in at least 
as good condition as it was at the date of the mortgage and 
to make all necessary renewals or repairs. 

To protect bondholders from an unauthorized increase in 
the debt secured by the lien of the mortgage, nearly all mort- 
gages contain a covenant that the mortgagor will not extend 
or in any way assent to the extension of the time for the 
payment of any interest on the outstanding bonds. Most 
mortgages go one step further and provide that any interest 
so extended shall not be entitled to the benefit of the lien 
of the mortgage except after the full payment of the principal 
of the outstanding bonds not so extended and of all interest 
thereon. 


104 WORK OF CORPORATE TRUST DEPARTMENTS 


Other covenants.—Other covenants vary with the mort- 
gage in hand. They frequently impose some administrative 
duties on the trustee. Typical of these covenants are those 
discussed below. 


As to the underlying bonds.—In the case of a refunding 
mortgage, it is usual to insert covenants to the general effect 
that the mortgagor will pay as it matures the principal and 
interest on all underlying bonds, and that it will not issue 
additional underlying bonds, or extend the date of payment 
of existing underlying bonds. The trustee, under a mortgage 
containing such a provision, should promptly serve formal 
notice on the trustees of the underlying mortgages, of the 
execution of the new mortgage, and of the covenant therein 
contained. Sometimes the right to issue further underlying 
bonds for deposit under the refunding mortgage is reserved. 


Taxes assessed against bondholders—Many mortgages 
contain provision that the principal and interest shall be paid 
to the bondholders without deduction for taxes. Since the 
enactment of the Federal Revenue Act of 1913, with its pro- 
vision for the “‘withholding at the source” of the normal tax 
on certain types of income, including bond interest, the tax 
covenant, in so far as it relates to income taxes, has generally 
undergone some qualification. Under the older mortgages 
with the unqualified tax covenant some effort was made to 
force the mortgagor to assume the full normal tax. Conse- 
quently, the newer mortgages containing a provision of this 
kind usually limit the liability to 2 per cent of the interest. 
When, during the discussion on the passage of the Federal 
Revenue Act of 1917, it appeared that collection of tax at 
the source would be abolished (except in the case of non- 
resident aliens) fears were felt as to the effect on bonds with 
such covenants of the rescinding of the withholding provisions 
of the law, and largely through the efforts of the Investment 
Bankers Association, ‘‘collection at the source’’ was continued 
in respect to the so-called ‘‘tax-free covenant’’ bonds. 

Some mortgages also provide for the payment or refunding, 
within prescribed limits, of taxes such as the Pennsylvania 
‘four mills” tax, the Massachusetts income tax, and the per- 
sonal property or income taxes of other specified states. In 
the case, for example, of such a covenant made by a Penn- 


COVENANTS OF THE MORTGAGOR 105 


sylvania mortgagor (see the ‘“Telephone’’ mortgage, page 363), 
it is sometimes provided that the interest will be paid free 
of such tax. It is more usual, however, for the covenant 
to take the form of a promise to refund to the bondholder 
the amount of the specified tax, up to the agreed limit, as- 
sessed by the specified state against the bondholder, as the 
holder of bonds issued under the mortgage. The mortgage 
will usually provide that such refunds shall be made by the 
trustee, as the agent of the mortgagor, but from funds to be 
furnished for that purpose by the mortgagor, and only upon 
receipt from the bondholders, of written application, in form 
specified by the mortgage, and filed with the trustee within a 
specified period, say sixty or ninety days, after the date of 
payment of the tax to be refunded. Form 32 is a good 


example of the type of refund application, which is often 
required. 


Form 32.—Personal Property Tax Refund Application. 


APPLICATION FOR REFUND OF PENNSYLVANIA PERSONAL 
PROPERTY TAX 


DIRECTIONS 


Applicants for refund of tax on this form should, to avoid delay, observe 
the following directions: 


1. This request may be made only by a holder who was an owner of the 
bonds and a resident of Pennsylvania on the date when such tax was 
assessed. 

2. This request must be filed within sixty (60) days after the date on which 


the tax was paid and within ninety (90) days after such tax shall have 
become due and payable. 


3. Request should only be made for the amount of tax actually paid (on the 
market value or the face value of the bond, whichever is less). The Com- 
pany is not liable to pay to any owner in any calendar year a sum in 
excess of four (4) mills on each dollar of the face amount of the bonds 
with respect to which the tax was paid. 

4. Applicant must sign affidavit following form of request. 


THE HAGERSTOWN STEEL AND TUBE COMPANY 
20-YEAR 6% DEBENTURE GOLD Bonps 


To THE HAGERSTOWN STEEL AND TUBE COMPANY, 
Care, National Trust Company, Trustee, 
200 Wall Street, 
New York, N. Y. 


Dated, —— 19—. 
Sirs :— 


I am the owner of $ 


principal amount of 20-Year 6% Debenture Gold 
Bords, Nos. 


issued by Hagerstown Steel. and Tube Company, under its 


106 WORK OF CORPORATE TRUST DEPARTMENTS 


Debenture Indenture to National Trust Company, Trustee, dated July 1, 1925, 
and was the owner thereof and a resident of the Commonwealth of Pennsyl- 
vania at the date of the assessment of the tax hereinafter mentioned. 


As a resident of Pennsylvania, I returned said bonds for taxation for the 
year 19— at a valuation of $ , and on the day of 19—, I paid 
the sum of $ , the tax assessed against me by said State as the owner 
of said bonds, and which became due and payable on the day of A 
19—. 

Such taxes were not income, succession or inheritance taxes and the 
amount for which I claim reimbursement does not include any interest or 
penalty assessed upon or paid by me in addition to the amount of tax origin- 
ally assessed. I hereby request from you reimbursement of said tax as provided 
by said Indenture. No other or previous application has been made with 
respect to the aforesaid bond or bonds for reimbursement of any tax or taxes 
imposed or paid for the same year to which this application relates. 


Respectfully, 


Name 
Address 


COMMONWEALTH OF PENNSYLVANIA 
COUNTY OF ae 


, above named having been duly sworn according to law, on oath, de- 
poses and says that the facts set forth in the foregoing request are true. 


Signature of Applicant. 


Subscribed and sworn to before me this 
day of 19— 


Notary Public or other Official authorized 
to take acknowledgments. 

Insurance.—An agreement to insure against loss or damage 
by fire is found in practically every mortgage. Losses, if 
any, are payable to the trustee and the company as their inter- 
ests may appear, and unless required by the trustee of a prior 
mortgage, the proceeds of any insurance are deposited with 
the trustee; although mortgages frequently provide that any 
single loss not exceeding, say, $5,000, may be paid direct to 
the mortgagor. The amount of loss which may be paid direct 
varies in different mortgages, depending upon the value of 
the insured property and other circumstances. The company 
is generally permitted to withdraw insurance moneys to reim- 
burse it for the cost of (a) replacing the damaged or de- 
stroyed property, or (b) making betterments or extensions 
to other portions of the mortgaged property. 


107 


COVENANTS OF THE MORTGAGOR 


SyIeUIOY 


*‘plosay souvINsuUT— EE WIIOW 


— astiay, Jo Opn, 


"ON Adtod 


OD 0} peuinya1 


* pesonsep 


ANVINOS AQNVANSNI 


toa prnols SaIsog peidxy 


108 WORK OF CORPORATE TRUST DEPARTMENTS 


Until recently the familiar insurance clause provided for 
the deposit of the insurance policies with the trustee. How- 
ever, many of the newer mortgages permit the trustee to 
accept an annual statement from the company signed by one 
or more of its officers, giving the details of the insurance in 
force. In cases where the policies are deposited with the 
trustee they should be entered in an insurance record similar 
to that illustrated on page 107 (Form 33). 

Occasionally the insurance provisions call for the periodical 
filing of a certificate by a recognized insurance expert that the 
insurance in force constitutes full coverage as required by the 
mortgage. 

Protection solely through the establishment by a company 
of its own insurance fund, such as that permitted by Section 8, 
of Article VI, of the “Telephone” mortgage,’ is sometimes 
permitted in cases where the property is scattered and the 
mortgagor is especially strong. 

Life insurance policies are occasionally deposited with a 
trustee pursuant to a covenant providing for insurance on the 
lives of one or more of the mortgagor company’s officers. 
The conclusion to be drawn from such a provision is that the 
mortgagor is short of executives of ability and that the death 
of the insured would have a detrimental effect on the business. 
Covenants to maintain “use and occupancy” insurance some- 
times are found in mortgages covering factories and office 


buildings. 


Net quick assets —The covenant to maintain the com- 
pany’s net quick assets (the excess of the company’s current 
assets over its current liabilities as defined in the mortgage) 
at a stated figure, or in a specified proportion to the total 
liabilities of the company, or to the amount of bonds out- 
standing, is of comparatively recent origin and has been de- 
veloped by the underwriting bankers as a selling point.’ 

A covenant of this kind is unsatisfactory from the stand- 
point of administration by the trustee, and affords little or 
no actual protection to the bondholders. Barring bad faith 
on the part of executives, no corporation will intentionally 
permit net quick assets to fall below a safe point. It often 


2 See p. 364. 
3 See p. 109 for an example of net quick assets definition. 


COVENANTS OF THE MORTGAGOR 109 


happens that, during a period of financial stress, an otherwise 
sound corporation may find itself temporarily unable to comply 
with the terms of such a provision; but ordinarily it would be 
to the interest of the bondholders to give the company a 
reasonable opportunity to work out of its strained position. 
In any event, a foreclosure during a time of business depres- 
sion seldom produces satisfactory results from the standpoint 


of the bondholders. 


In other words, such a provision makes it possible for a 
small percentage of bondholders, through an over-zealous 
trustee, to bring about a foreclosure at a most inopportune 
time. If such a default occur, the trustee is quite likely 
to be criticized by some bondholders if it takes no action; 
and, on the other hand, it is almost certain to be criticized 
by other bondholders if it does institute legal proceedings. 
It would not be so bad if the trustee could feel free to notify 
the bondholders of the situation and leave the matter in their 
hands. ‘The practical aspect is that a notice from the trustee 
to the bondholders of the existence of such a default might 
so seriously injure the company’s credit that liquidation would 
be brought about, even without the intervention of the bond- 


holders. 


Covenants restricting dividends or bond issues.— There are 
other varieties of the net quick assets provision which are 
sound in principle, the most common being that the company 
will pay no dividends on its stock or that it will issue no more 
bonds unless its net quick assets shall meet with the require- 
ments of the mortgage provision. Such covenants are entirely 
workable from the standpoint of the trustee, and are of real 
protection to the bondholders. In any mortgage containing 
provisions relating to net quick assets, there is also a covenant 
by the company to file with the trustee periodically a state- 
ment, usually certified by accountants approved by the trustee, 
of its assets and liabilities, and of its net quick assets. Such a 
mortgage should contain a very clear and comprehensive de- 
finition of what is meant by net quick assets, as for example: 


“The term ‘net quick assets,’ whenever used herein with 
respect to the Company, means the excess of its unencumbered 
quick assets over its current liabilities. 


110 WORK OF CORPORATE TRUST DEPARTMENTS 


‘The term ‘quick assets,’ whenever used herein, means and 
includes only, 

(a) Cash on hand or on current deposit in banks or other 
depositaries. 

(b) Good and collectible notes, trade acceptances, accounts, 
and bills receivable contracted in the ordinary course of busi- 
ness, if not in default and if due and payable within one year 
from the date as of which quick assets are being ascertained. 

(c) Readily marketable securities taken in any case at not 
more than their market value. 

(d) Goods manufactured and in process of manufacture, 
materials and supplies on hand and inventoried, the said 
goods, material, and supplies being taken at actual cost or 
at market value, whichever is the lower at the time of such 
inventory. 

(e) Unexpired insurance premiums, discounts prepaid on 
bills payable (not including bond discounts), and prepaid 
taxes. 


‘The term ‘current liabilities,’ whenever used herein, in- 
cludes accounts, drafts, bills and notes payable, royalties, 
rentals, and sinking fund obligations accrued, earned and un- 
matured interest charges upon the bonds at any time out- 
standing hereunder and reserves for taxes of every kind and 
nature, but excludes: 

(a) The principal amount of the bonds issued and out- 
standing hereunder. 

(b) Obligations not payable within one year from the date 
of the last preceding audit herein provided for. 

(c) Drafts or bills of exchange drawn for the whole or 
any part of the amount payable on account of merchandise 
sold to others and which drafts or bills of exchange have 
been negotiated, and other contingent obligations.” 


Annual financial statements.—- Many mortgages which do 


not contain a net quick assets covenant do require the annual — 


audit of the companies’ books, by certified public accountants, 
satisfactory to the trustee, and the annual filing with the 
trustee of a balance sheet, and sometimes, also, a statement 
of earnings certified by such accountants. Such a requirement, 
particularly in the case of industrial companies, is of real 


COVENANTS OF THE MORTGAGOR BEL 


value, as it places in the hands of the trustee available to the 
bondholders, an authentic, year-to-year record of the financial 
progress (or lack of progress) of the mortgagor. 


In regard to the approval of accountants selected by the 
company the trustee should investigate the standing of any 
firm not already known to it. This is usually a simple matter 
except when the accountants employed are located in another 
city. In that event the trustee can secure a report from one 
or more local banks or protect itself with opinions from other 
members of the accounting profession. Likewise the trustee 
may be called upon to ascertain the standing of engineers or 
appraisers whose opinions are required by other provisions 
of a mortgage. 


Equipment.—Other mortgages, particularly those of rail- 
roads and public utilities, contain a covenant to file periodi- 
cally with the trustee a certified list of equipment or other 
similar property subject to the mortgage.* 


Sales.—Still other indentures which permit the mortgagor 
to sell certain classes of property, or property of less than 
a stated value, without payment of the proceeds to the trustee, 
require the filing with the trustee at stated intervals of a 
certificate covering the details of such sales. 


Appraisal.— Occasionally in mortgages of industrial com- 
panies, a covenant will be found requiring the filing with the 
trustee, periodically, but usually not oftener than every two 
or three years, of an appraisal of all of the mortgaged prop- 
erty, made by an engineer or appraiser, satisfactory to the 
trustee. 


Maintenance and renewal.—Some mortgages require that 
the mortgagor shall annually expend out of earnings, for 
maintenance, a specified amount in dollars, or, as is more 
usually the case, a specific percentage of earnings. 

In that event the mortgagor is required to file with the 
trustee, in addition to the balance sheet and statement of 
earnings, a certificate giving the details of the expenditures 
for maintenance during the period covered. This certificate 
frequently takes the form of an affidavit by certain officers. 


4See further discussion under Equipment Trusts, Chapter XII. 


112) WORK OF CORPORATE TRUST DEPARTMENTS 


Generally, such a mortgage will further require that, if the 
amount so expended, as shown by the certificate, is less than 
the required amount or percentage, the difference must be 
paid in cash to the trustee as a depreciation or maintenance 
fund, and held by the trustee, until withdrawn by the com- 
pany, in accordance with the terms of the mortgage, after it 
has completed the delinquent maintenance expenditures. 


Covenants to be calendared.—It is essential that the 
trustee carefully study the covenants as soon as possible after 
receiving the mortgage. All covenants, the terms-of which 
call for observation on the part of the trustee, should be 
calendared on “‘tickler’” cards (see Form 28, page 73) sufh- 
ciently in advance of the requirement date to assure proper 
attention. | 


Mortgagor’s breach of covenants.—In case of failure by a 
mortgagor to comply with such a requirement, the trustee 
should send a prompt reminder. As stated in Chapter X, 
page 146, failure by a mortgagor to observe such covenants 
does not, under many mortgages, become a default entitling 
the trustee to enforce the remedies of the mortgage, except 
upon the elapse of a specified period, say 60 days, after writ- 
ten notice from the trustee to the mortgagor. Ordinarily, 
the first reminder from the trustee would be informal and 
not of the type to set running the period of grace prescribed 
by the mortgage. In the absence of directions from the 
holders of the percentage of the bonds required by the mort- 
gage, the question of when the formal notice should be served 
would depend largely upon circumstances. Formal notice 
should not be served except after consultation with counsel. 

It is not possible safely to generalize as to the proper 
action to be taken by a trustee in case the mortgagor should 
disregard its notice or fail to make good its breach of cove- 
nant. The question is first of all one of the exact legal rights 
of the trustee. ‘The relative importance of the covenant 
in default and the apparent ability and willingness of the 
mortgagor to live up to the requirement may well have some 
practical bearing on the attitude of the trustee. If it is pos- 
sible for the trustee to consult with the holders of a substan- 
tial percentage of the bonds, or with bankers who have under- 
written all or a part of the issue, the views of such holders 


COVENANTS OF THE MORTGAGOR 113 


or bankers should be considered. However, the situation is 
cne in which the trustee should act only after submitting all 
phases of the question to its counsel. 

In closing the discussion of this article of the mortgage the 
following quotation seems appropriate: 

‘Tt is important to keep in mind that the purpose of these 
covenants is to safeguard the value of the mortgaged premises 
in the interest of the mortgagee. They impose a personal 
liability on the mortgagor. Aside from the covenant to pay 
interest and principal promptly when due, they may not be 
valuable, in terms of currency, to the mortgagee; but the 
presence of these covenants in the mortgage may be highly 
important in affording a basis for stipulating that a breach 
shall constitute an event of default, so as to permit the trustee 
to exercise promptly remedies to prevent depreciation in the 
value of the mortgaged property, disastrous to the mort- 
TATee 


5 William Lilly, “Individual and Corporation Mortgages,” p. 114. 


CHAPTER VIII 
SINKING FUNDS AND REDEMPTION OF BONDS 


The sinking fund.—Many corporate mortgages provide a 
means of amortizing the debt for which they are security, 
by requiring the mortgagor to make periodical payments into 
a fund, which is commonly known as the Sinking Fund.* Such 
a fund is ordinarily administered by the trustee under the 
mortgage, although in some mortgages a separate sinking 
fund trustee is named. 


Sinking funds vary with business of mortgagor.— 
Generally speaking, the question of whether a given issue is 
to have a sinking fund is decided by the underwriting bankers, 
with the concurrence, of course, of the mortgagor. In de- 
termining this point the type of business in which the mort- 
gagor is engaged is the first consideration. It is the general 
practice of underwriters to require a sinking fund in the case 
of bond issues by lumber, mining, and other companies, where 
the property which is mortgaged as security for the bonds 
obviously will be depleted through the operation of the busi- 
ness. It also is usual to recommend a sinking fund for bond 
issues of industrial concerns. ‘The reason in this class of 
business is not so apparent, but, nevertheless, is sound. The 
chief value of an industrial plant is its value as a “going 
concern,” and it almost invariably happens that a forced sale 
of such a plant, through bankruptcy or foreclosure proceed- 
ings, will produce much less than the actual value. It is 
consequently a prudent policy to require a periodical reduc- 
tion of the debt, so that the equity of the company in its plant 
(or, to put it another way, the bondholders’ margin of safety) 
shall be constantly increased. In many cases sinking funds are 
also required by underwriters because, if their provisions are 
wisely drawn, they have a stabilizing effect on the market, 
thus adding to the attractiveness of the issue. 

On the other hand, it is becoming more and more the rec- 


1 Reference is made to the “Telephone” mortgage, p. 358. 


114 


SINKING FUNDS AND REDEMPTION OF BONDS — 115 


ognized theory that railroad and certain public utility com- | 
panies are entitled, because of their permanency, and so long 
as in their accounts they make proper allowance for deprecia- 
tion, and maintain a conservative ratio between the amount 
of their capital stock and debt, to carry a practically perman- 
ent debt, bond issues being refunded from time to time as 
they mature. For this reason, many recent issues of such 
companies do not provide a sinking fund. 


Bases for sinking funds.—In the case of a company whose 
property is depleted through the normal operation of its 
business, the logical basis is the amount of property used, 
as, for instance, a specified amount per thousand feet of lum- 
ber cut or per ton of ore mined. Industrial companies pass 
through periods of prosperity and periods of depression, and 
for this reason it is generally wise to require substantial 
reductions in their debt during profitable years and to avoid 
handicapping them by unnecessary fixed charges during periods 
of depression. Consequently, sinking funds of companies of 
this class are usually based on a percentage of net earnings. 
In still other cases, where the purpose is to increase the bond- 
holders’ margin of safety or to stabilize the market, the 
amounts of the periodical payments into the sinking fund are 
fixed, or are based on a specified percentage of the principal 
amount of bonds outstanding. At times the purpose is to 
amortize the entire debt by maturity, and the amount of 
the periodic payment is then set at a figure which at compound 
interest at the rate borne by the bonds will at maturity of 
the bonds equal the amount of the issue. 


Operation of sinking funds.— There is a considerable varia- 
tion in the provisions covering the operation of sinking funds. 
In some of the older mortgages it was provided that the cash 
payments should be invested by the trustee in specified classes 
of securities and such investments held by the trustee until 
maturity of the issue. This practice is not generally favored. 
While there may be some point to the acquisition by the trus- 
tee of underlying bonds, the plan of investing in securities 
entirely foreign to the mortgagor’s business at an income yield 
smaller than a fair return on any successful business is not 
sound. It is now recognized as better practice to provide 
for the use of the fund in the acquisition of bonds of the issue 


116 WORK OF CORPORATE TRUST DEPARTMENTS 


for the benefit of which the fund is created. Some sinking 
funds require that bonds acquired shall be canceled, while 
others require that they shall be held alive and the interest 
thereon collected as it matures and added to the sinking fund, 
thus adding the feature of compound interest, and over a 
period of years materially increasing the amount amortized 
through the operation of the fund. Where this cumulative 
feature is desired, the same result may be accomplished by 
authorizing the cancellation of the bonds as acquired, and 
providing that the sinking fund payments at the specified sum 
or rate shall be increased by a sum equal to the periodic 
interest which would have been due on the canceled bonds in 
the sinking fund. 

Some mortgages permit the company to deposit with the 
trustee additional amounts not required by the sinking fund 
provisions. We speak of these as voluntary or optional pay- 
ments. ‘They are usually added to the required sinking fund 
payments and treated in the same manner. 


Acquisition of bonds.—The sinking fund provisions relat- 
ing to the methods by which bonds are to be acquired are 
of particular interest to the trustee. Here, again, there 
is a rather wide variety. One mortgage may require that 
the bonds shall be drawn by lot by the trustee for redemption 
at a specified redemption price; another, that bonds may be 
purchased by the trustee on tender by the bondholders, pur- 
suant to published notice from the trustee requesting such 
tenders; while still another will authorize the purchase of 
bonds at public or private sale and, if suficient bonds are not 
secured at or below a specified price, will require the redemp- 
tion of as many bonds as will exhaust the balance of cash 
in the sinking fund. Application of moneys in the sinking fund 
often is not required unless the balance standing to the credit 
of the sinking fund amounts to a specified sum, deemed large 
enough to warrant setting the machinery in motion. Some of 
the new mortgages which authorize the issue of bonds in series, 
each subject to different provisions as to sinking fund and 
redemption, necessarily contain rather complicated sinking fund 
clauses. 


The trust officer in reading a mortgage prior to execution 
should be certain that the provisions are entirely clear and 


SINKING FUNDS AND REDEMPTION OF BONDS 117 


workable. Some of the particular points which should be 
considered are discussed below. 


The measure of the payment.— In the case of variable sink- 
ing fund payments the mortgage should set forth just what evi- 
dence must be furnished to the trustee as to the sufficiency 
of each payment. If the payment is at a specified rate per 
cent of the net earnings, it is important that the mortgage 
should contain a clear definition of what constitutes net earn- 
ings, and further provide that the trustee may rely, as to the 
amount of such earnings, on some statement to be filed with it, 
as, for instance, a statement certified by certified public ac- 
countants, or verified by designated officers of the debtor. 
If the payment is at a specified percentage of the outstanding 
bonds, the mortgage should clearly state what bonds are to 
be considered as outstanding, for example, that all bonds 
which at any time have been certified and delivered by the 
trustee and have not been surrendered to it for cancellation 
shall be considered as outstanding. 


At first glance, the meaning of the word “outstanding” 
seems perfectly clear; but, from the trustee’s viewpoint, bonds 
are outstanding as soon as certified and delivered pursuant 
to the provisions of the mortgage, while, generally speaking, 
the company will not consider bonds outstanding until they 
have been disposed of by the company for value. ‘The newer 
mortgages are carefully drawn to clarify this point, but the 
question has arisen under a number of mortgages. Under 
one, a test suit on an agreed statement of facts was brought 
in the New York courts,” and a decision rendered to the effect 
that bonds are issued and outstanding, not when they have 
been certified and delivered under the mortgage, but as soon 
as they have passed into the hands of third persons as enforce- 
able obligations. In other words, in this particular case, 
bonds which had been certified and delivered under the mort- 
gage, but were held free in the treasury of the company, were 
not considered outstanding. On the other hand, bonds which 
the company had sold, or which it had hypothecated, were 
considered outstanding. This decision was only partially sat- 
isfactory from the trustee’s point of view, and while it has 


2 Bankers Trust Company v. The Denver Tramway Company, 233 N. Y. 
604. 


118 WORK OF CORPORATE TRUST DEPARTMENTS 


been used as a precedent in several other cases, it is not of 
creat value in helping to settle similar questions under other 
mortgages, because there is almost always a difference in 
phraseology between any two mortgages. 


The application of the fund.—The first question is whether 
the methods by which the trustee may acquire bonds for the 
fund are clearly stated. If, as is sometimes the case, provision 
is made merely for the redemption of bonds, it is only neces- 
sary to see that the redemption price or prices are clearly 
stated, and that there is sufficient time between the sinking 
fund payment date and the date on which the trustee is re- 
quired to make the redemption to permit the trustee to draw 
bonds by lot and to publish notice of redemption as required 
by the mortgage. If the trustee is permitted to purchase 
bonds at public or private sale or on tender, and authorized 
to call for redemption only if suficient bonds cannot be pur- 
chased to exhaust the funds available, it is important that 
sufficient time be allowed to complete the necessary steps. 
The duration of the purchasing period, the requirements as 
to publication of notice inviting tenders, and the provisions 
covering publication of the redemption notice should be ade- 
quately detailed in the mortgage. 


Inviting tenders.—In all cases where the trustee is per- 
mitted or required to publish notice inviting tenders the mort- 
gage should specify the period during which the notice must 
be published and the media of publication. A further stipula- 
tion should be made that the trustee may accept or reject any 
tender in whole or in part. 

The following sinking fund notice is typical: 


| GENERAL MACHINE COMPANY 
Six Per Cent Ten Year Sinking Fund Convertible Gold Bonds 


The undersigned, as Trustee under Trust Agreement between General 
Machine Company and National ‘Trust Company as Trustee, dated June 1, 
1924, hereby gives notice that it will receive sealed offers for the sale for the 
account of the Sinking Fund of sufficient of the above-mentioned bonds to 
exhaust the sum, $51,292.21, now on deposit with it as such Trustee. All 
tenders must be for all or any part of the bonds offered, must state the price 
at which the bonds are offered, not exceeding 105 per cent of their principal 
amount and accrued interest, and must be received at the Corporate Trust 
Department of the Trustee, 200 Wall Street, New York City, before 3 o’clock 


SINKING FUNDS AND REDEMPTION OF BONDS __ 119 


P. M. on April 27, 1925. Bonds accepted must be delivered on May 4, 1925, 
and interest on accepted bonds will cease on that date. 

The Trustee reserves the right to reject any and all offers in whole or in 
part. 

Dated at New York this 10th day of April, 1925. 


NATIONAL ‘TRUST COMPANY, Trustee. 
By H. F. Wall, Vice President. 


Acceptance or rejection of tenders.—It is well to have the 
mortgage provide a method by which the trustee shall deter- 
mine which tender or tenders to accept in case more bonds 
are offered at one price than the available funds will purchase. 
As a simple example of this last point assume that $50,000 
were available in a sinking fund and four tenders were re- 
ceived as follows: 


A—$20,000 at 99 and interest C—$10,000 at 100 and interest 
B— 20,000 at 99%4 and interest D— 10,000 at 100 and interest 


After accepting offers 4 and B the trustee would have some- 
what over $10,000 left to take up $20,000 of bonds offered 
at 100. ‘Three methods are used: 


1. To draw by lot from all bonds offered by C and D. 

2. To purchase $5,000 from C and $5,000 from D. 

3. To take bonds, as between C' and D, from the first 
tender received disregarding the subsequent offer. 

This last method should be used only when specified in the 
mortgage. If the mortgage is silent on the question it would 
seem that the trustee might use either method “1”? or method 
2” and accord fair treatment to the bondholders concerned. 

It is not always possible to determine at first glance which 
tenders of bonds are to be accepted. Some bonds may be 
tendered at certain prices and interest; others may be offered 
at “flat” prices, that is, without interest; while still other 
bonds may be offered for a stated amount in dollars. ‘The 
trustee must place all offers on a comparative basis. For 
example: A tender of bonds at 98 “flat”? may warrant ac- 
ceptance over a tender at 97% and interest. In any event 
the tenders can be compared only by computing in each case 
the actual cost in dollars. In some mortgages the accrued 
interest on bonds taken up through the sinking fund is pay- 
able by the mortgagor, in which case the factor or accrued 
interest should be disregarded in comparing the price of sink- © 
ing fund offerings. 


120 WORK OF CORPORATE TRUST DEPARTMENTS 


The trustee should send prompt notice of acceptance or 
declination of tenders, and the acceptance notices should give 
full directions as to the delivery of the bonds to the trustee. 
If the published notice has not specified the date on which 
interest ceases on the bonds purchased, that date should be 
stated in the trustee’s acceptance. 


Offer of bonds by mortgagor.—Frequently the mortgagor 
itself will tender bonds to the sinking fund. ‘This situation 
may present some difficulties to the trustee, particularly in 
case the bond issue is so closely held that, perhaps, no other 
tenders are received and the trustee cannot secure market 
quotations to compare with the mortgagor’s tender. It is 
well to have the mortgage clearly state whether the mortgagor 
shall have the right to tender bonds which it may own. 


Drawing by lot for redemption.—If the mortgage provides 
that bonds may be drawn for redemption for account of the 
sinking fund, it should state that if less than all of the out- 
standing bonds are to be so redeemed, the bonds to be called 
shall be drawn by lot, by any equitable method which the 
trustee in its discretion shall determine upon. ‘The details 
of drawing by lot will be discussed later. 


Custody of acquired bonds.—There should be specific pro- 
vision as to whether bonds acquired by the trustee should be 
(a) held uncanceled, (b) held alive but endorsed as having 
been acquired by the sinking fund, (c) canceled. If the bonds 
are to be held uncanceled, or alive and appropriately endorsed, 
the mortgage will provide that the interest as it matures on 
such bonds shall be collected by the trustee and added to the 
sinking fund for use in future purchases. 


Accrued interest and expenses.—To avoid possible dispute 
during the administration of the trust it is well for the trust 
officer, in examining the draft of a proposed mortgage, to see 
that specific provision is made that all expenses of administra- 
tion, such as publication costs, as well as accrued interest on 
bonds acquired, shall either be charged to the sinking fund, or 
as is more usual (at least with respect to expenses), be paid 
by the company. 


Surrender of bonds in lieu of cash.—If it is intended to 
permit the company to surrender bonds to the trustee in lieu 


SINKING FUNDS AND REDEMPTION OF BONDS _ 121 


of making a cash sinking fund payment, this right should be 
clearly expressed, as well as the price at which the bonds 
shall be accepted by the trustee as offsetting the company’s 
cash obligations. 


Mortgages authorizing bonds in series.—Mortgages au- 
thorizing bond issues in series will provide that bonds of the 
different series may differ in their terms, such as maturity, 
interest rate, sinking fund, redemption, or conversion, and 
that the terms of each series may, within limits set forth in 
the mortgage, be fixed by the directors of the company. In 
such a mortgage, unless it is provided that an independent 
sinking fund may be operated for each series pursuant to the 
terms of the supplemental indentures or resolutions estab- 
lishing such series, it is good practice to insert a sinking fund 
article which will set up provisions governing the general 
operation of all sinking fund deposits. ‘These general provi- 
sions should direct the trustee to pro-rate the sinking fund 
moneys to the different series on the basis of the amount of 
outstanding bonds of each series, or should authorize the 
trustee to place tenders of different series on a comparative 
basis. It is simple for the trustee, if the funds are pro-rated 
and the amount available for each series transferred to sub- 
accounts. Otherwise, it may be necessary for the trustee to 
reduce all sinking fund tenders to terms of the “yield” or 
net return on the bonds offered. 

Assume, for example, that series “‘A”’ 5 per cent bonds 
maturing in fifteen years are tendered at 87% and series 
“B” 6 per cent bonds maturing in twenty years are tendered 
at 91. While the offer of series “A” bonds is at the lower 
price, their yield to maturity would be only 6.30 per cent 
against a yield of 6.75 per cent for the series “‘B’’ bonds if 
purchased at 91.? Consequently, on the basis of yield, the 
‘‘B” bonds are the more favorable purchase. 


Capital expenditure alternative—Some mortgages, par- 
ticularly those on property of public utilities, will provide 
that, in lieu of permitting the trustee to apply the sinking 
fund to the retirement of bonds, the company may withdraw 


3Computed by Montgomery Rollins, “Table of Bond Values” (Interest 
payable semiannually). ‘The above figures are carried to two decimal places 
only. 


122 WORK OF CORPORATE TRUST DEPARTMENTS 


the cash in reimbursement to it for capital expenditures of 
the type which may be used as the basis for the issue of bonds. 
If such an option is contained in a mortgage and is availed 
of by the company, the sinking fund changes in character and 
becomes, in effect, a maintenance or betterment fund, not a 
sinking fund. ‘The provisions of such a fund should be very 
carefully checked just as the bond issue provisions are checked. 
The problems from the trustee’s point of view are practically 
the same. 


Discussion of “Telephone” mortgage provisions.—The 
sinking fund and redemption provisions of the ‘“Telephone”’ 
mortgage are typical (see Articles IV and V, pages 358 to362). 
By those provisions the company covenants to pay the trustee 
a fixed amount semiannually. ‘The moneys so received by 
the trustee are required to be applied to the purchase of 
bonds of series “‘A’’ at a price not exceeding that at which 
bonds may be called by lot for redemption, namely, 105 per 
cent of their principal amount. ‘The matter of advertising 
for tenders is, in this case, left to the discretion of the trustee. 
Its decision on this point would depend chiefly on the extent 
to which bonds are available in the open market. For ex- 
ample, there would be much less reason for advertising for 
bonds which were actively traded in on the Stock Exchange 
than for bonds of an issue closely held by investors. If the 
trustee under the ‘“Telephone’”’ mortgage were unable to ac- 
quire enough bonds by purchase at or below the specified 
price it would be obliged to “call” bonds in an amount sufficient 
to exhaust the fund and the holders of bonds so called would 
be required to surrender such bonds to the trustee on the 
interest date specified in the redemption notice after which 
date interest on the “called” bonds would cease. The process 
of selecting bonds for redemption should be carried out in 
exact compliance with the stipulations of the mortgage. At 
least two representatives of the trustee should be present 
and, if practicable, a representative of the company. From 
cards, each bearing the number of an outstanding bond, the 
trustee selects a sufficient number, calculated at the re- 
demption price, to exhaust, as nearly as may be, the avail- 
able sinking fund moneys. Care should be taken to see that 
no cards are included for bonds which have been canceled 


SINKING FUNDS AND REDEMPTION OF BONDS — 1238 


or those previously acquired for the sinking fund. As soon 
as the numbers have been drawn arrangements should be 
made for publication of the redemption notice as required by 
the mortgage. The ‘Telephone’ mortgage, in common with 
many others, charges the mortgagor company with the re- 
sponsibility of making proper publication of the notice. In 
practice the trustee generally supervises this detail at the re- 
quest of, and in codperation with, the company. In case a 
registered bond is called, notice should always be sent to the 
registered bondholder through the mails and most mortgages 
will so provide. 


Large bond drawing.— The exacting nature of this phase 
of the trustee’s activities will be realized by all who have been 
closely connected with a large bond drawing. One trust com- 
pany in New York recently drew by lot for redemption 
$10,000,000 of bonds represented by more than 11,000 pieces, 
the bonds being a part of an outstanding issue of $35,000,000. 
The task of drawing and listing that number of bonds, pre- 
paring and proofreading the redemption notice, and, finally, 
making payment of the bonds on the redemption date is one 
likely to tax the organization of any trustee. 


Rights of bondholder and company.—The subject of the 
redemption of bonds prior to maturity is one which warrants 
attention from every student of corporate trusts. In this 
connection the following statement of Mr. Francis Lynde 
Stetson* is of interest. 

“The right of the bondholder to continue his investment 
until payable in due course is as inviolable as his right to 
receive payment at maturity. The right of the obligor to 
free himself from his interest-bearing debt when due either 
upon a named or accelerated date, as the stipulation may 
warrant, is similarly inviolable. These relative and conflict- 
ing rights must be made the subject of careful and adequate 
stipulations. 

‘’The right to redeem before maturity is a valuable privilege 
of the obligor, particularly one obligated to supply a sinking 
fund. ‘The redemption price may be par or a premium over 
par. The redemption price is a matter of bargain between 


4“Some Legal Phases of Corporate Financing, Reorganization and Regula- 
tion,” p. 64. 


124 WORK OF CORPORATE TRUST DEPARTMENTS 


the obligor and the bond buyer. Usually it operates as a peg 
to stop the increase in the market price of the bonds, and, 
therefore, a redemption price high enough to leave some specu- 
lative possibility of increase in such market price is the usual 
insistence of the bond buyer.” 

During a period of high money rates the investor desires 
long-term bonds at the current rate of interest. On the other 
hand, the company which finds itself in the unfortunate position 
of having to borrow at such a time wishes if possible to issue 
either (1) short-term obligations, or (2) long-term bonds 
carrying a redemption feature, so that, when the money market 
eases sufficiently, it may refund the loan on a more favorable 
basis. When that time arrives the company, or the trustee act- 
ing under the company’s instructions, will take such steps as 
may be required by the mortgage to call the bonds for redemp- 
tion on a specified date. Should the company elect to redeem 
less than the entire issue (assuming that it has the right so to 
do) it will be the duty of the trustee to select by lot the bonds 
to be redeemed. 


Redemption notice.— When bonds of an issue are to be re- 
deemed, notice is published of the company’s intention. Here 
is an example of such a notice prepared pursuant to the terms 
of the “Telephone” mortgage: 


NOTICE OF REDEMPTION 
THE TELEPHONE COMPANY OF AMERICA 


To the Holders of The Telephone Company of America Twenty-five year First 
and Refunding Mortgage 5% Sinking Fund Gold Bonds, Series “A,” issued 
under First and Refunding Mortgage, dated October 1, 1925, to National 
Trust Company, as Trustee. 

Notice is hereby given that The Telephone Company of America has 
elected to redeem and pay off, on April 1, 1926, all of the above-mentioned 
bonds then outstanding, at 105 per cent of the face value thereof, with accrued 
interest thereon, in accordance with the terms of said bonds and said First 
and Refunding Mortgage, and that all of said bonds are called for redemp- 
tion on said date. On said date there will become due“and payable on each 
of said bonds, at the office of National Trust Company, 200 Wall Street, 
Borough of Manhattan, City of New York, the principal of said bonds, together 
with said premium and accrued interest to said date. Interest on said bonds 
will cease to accrue from and after said date. 

The coupons due April 1, 1926, should be detached and presented for pay- 
ment through the usual channel. 

Dated January 30, 1926. 

THE TELEPHONE COMPANY OF AMERICA. 


By L. H. Bell, President. 


SINKING FUNDS AND REDEMPTION OF BONDS 125 


Affidavits of publication.—Upon completion of publication 
of the redemption notice the trustee should secure from the 
publishers of the newspapers, or other periodicals wherein the 
notice appeared, afidavits bearing a copy of the notice and 
setting forth the dates of publication. If notices have been 
mailed to registered holders an appropriate afhidavit should be 
given to the trustee by the person mailing the notices. ‘The 
afidavits of publication and mailing are then placed in the 
trustee’s document file as evidence of compliance with the mort- 
gage provisions. 


Interest loss through failure to present bonds.—Interest on 
‘called’? bonds ceases on the redemption date and investors 
who do not carefully follow this feature of their investments 
frequently discover many months afterward that they are 
receiving no return from the ‘“‘called”’ securities. A situation 
of this kind often results in complaints from bondholders 
who have failed to take notice of the redemption. ‘The feel- 
ings of the bondholder are sometimes aggravated by reason of 
the deduction from the redemption price of interest paid 
since the redemption date. Paying agents use their best efforts 
to prevent payment of coupons from called bonds, but, not- 
withstanding their vigilance, coupons from called bonds occa- 
sionally will slip through. For example, assume that bonds 
of certain numbers are called for redemption on April 1. 
On the following July 1 coupons from some of the called 
bonds are collected by the bondholder. On the next succeed- 
ing January 1 the coupons from the same bonds are detected 
by the paying agent and returned to the bondholder who then 
presents his bonds for payment with a demand for interest 
subsequent to the call date. In matters of this kind several 
New York trustees and paying agents have used the following 
form of letter in replying to the bondholder: 

“Under the terms of the call, the bonds, when presented 
for payment, must bear the July 1, 1924, and all subsequent 
coupons, and as the bond in question was presented with the 
July 1, 1924, coupon detached, we followed the prevailing 
custom of paying agents in this city and deducted the amount 
of the missing coupon from the redemption value of the bond. 

‘“‘A matter of policy is involved which concerns not only 
ourselves but all paying agents. Experience has shown that 


126 WORK OF CORPORATE TRUST DEPARKTMEN'S 


no amount of care in the offices of such paying agents will 
insure both the instantaneous payments of all coupons which 
ought to be paid (and that is a matter which is of vital im- 
portance to the bondholders as a class), and at the same time 
insure non-payment in every instance of every coupon which 
ought not to be paid because called for previous redemption. 
As paying agents, we do not act as guarantors either to the 
obligor on the bond or to the bondholder that no error what- 
ever will occur in connection with the payment of coupons. 
All we can undertake to do is to furnish the best possible 
service and establish the best possible safeguards against 
error. 

“The terms of the bond and coupon are explicit and carry 
clear notice to the bondholder that he is not entitled to receive 
payment of coupons from bonds called for previous redemp- 
tion. ‘The call for redemption was published in accordance 
with the requirements of the bonds. ‘The coupon presented 
was one which, according to its terms, should not have been 
presented by the bondholder, and to the payment of which he 
was not entitled. It goes without saying that the bondholder’s 
action in presenting this void coupon for payment and in ob- 
taining payment of it from us was altogether the result of a 
mistake and not intentional on his part. It was, however, as 
much his duty to heed the terms of the contract and the pub- 
lished notices of redemption as it was ours to do so. Upon 
full consideration, we cannot feel that the bondholder is, under 
such circumstances as these, entitled to collect the January 1 
coupon or to retain the proceeds of the July 1 coupon, which 
was paid as the result of a mutual mistake. 

‘The amount involved is small and we so much wish to give 
satisfaction to all who have dealings with us that we should be 
glad indeed if we could see our way clear to meet your wishes 
and refund the amount of the July coupon. But, after con- 
sultation with the principal paying agents in this city, we are 
advised that this would involve the establishment of a very 
troublesome precedent. ‘They feel that the solution of the 
problem lies in bringing very emphatically to the attention of 
the investors, and of banks, trust companies, and dealers who 
collect their coupons, the fact that it is necessary to keep track 
of the published calls for redemption of bonds of the issues 
in which they or their clients are interested. The paying 


SINKING FUNDS AND REDEMPTION OF BONDS — 127 


agents fear that the result of refunding the July coupon 
in this case would be to lure investors and their representa- 
tives into a false sense of security and make them less atten- 
tive than heretofore to published notices of redemption, thus 
aggravating a situation which is already troublesome. It 
would seem that this problem canbe solved only by the 
cooperation of investors and collecting agents with paying 
agents, to the end that redemption notices shall not be dis- 
regarded.” 


CHAPTER IX 


PLEDGED SECURITIES; RELEASES; 
SUPPLEMENTAL MORTGAGES 


Control of pledged securities.— Mortgages which involve 
the pledge of stocks or bonds as security, in addition to the 
lien of the mortgage on physical property, contain various 
provisions relating to the control: of the pledged securities. 
The recognized practice is to group provisions of this nature 
in a separate article of the mortgage’ to which the trustee 
will refer when considering questions arising out of its inter- 
est, as pledgee, in such securities. 

Briefly, the intent of these provisions is to permit the com- 
pany, in the absence of default, to collect the income from, 
and to vote upon, the pledged securities, although the trustee 
has physical possession thereof and the right to assume full 
control in case default occurs. With the object of preventing 
any diminution in the security, a number of protective clauses 
are usually inserted in the mortgage. For example: 


(a) While the company shall be entitled to collect the in- 
come from the securities it shall not receive any payments 
on account of principal nor any capital distributions; (b) 
while the company shall be entitled to use a sufficient number 
of shares of stock to qualify directors or officers of the com- 
pany whose stock is pledged, the use of stock for that pur- 
pose must be under conditions satisfactory to the trustee; 
(c) while the company shall -have the right to vote stock for 
all ordinary purposes, it shall vote for an increase in the 
corporation’s indebtedness or capitalization only to the extent 
permitted and upon the conditions imposed by the mortgage; 
(d) in case of reorganization, consolidation, or merger of any 
company whose securities are pledged, the mortgagor com- 
pany is authorized, with the assent of the trustee, or the 
trustee alone is authorized to take such steps as may be neces- 
sary to protect the interest of the bondholders. 


1 Reference is made to Article III of the typical mortgage, p. 354. 


128 


PLEDGED SECURITIES; RELEASES; ETC. 129 


To summarize, in the company and the trustee are com- 
bined the full powers of the ordinary security-holder. Gen- 
erally speaking, the company, in the absence of default, is per- 
mitted to manage the interests represented by the pledged 
securities as it manages its business; but its rights in this re- 
spect are subject at all times to mortgage provisions designed 
to protect the interests of the bondholders.? 


Possession of pledged securities and registration thereof.— 
In practically all cases the pledged securities are actually 
deposited with the trustee. Exceptions to this rule are those 
instances where the securities are in the hands of the trustee 
under a prior mortgage, which circumstance is discussed later 
in this chapter. Certificates of stock placed with the trustee 
under a mortgage may or may not be registered in the trus- 
tee’s name. There is no uniformity in mortgage requirements 
on this subject. Under many mortgages the company is per- 
mitted, in the absence of default, to have pledged securities 
registered in its name or in the names of its nominees; while 
in other mortgages the trustee is required promptly to secure 
transfer of the securities into its name or the names of its 
nominees. In still other mortgages the matter of transfer is 
left to the discretion of the trustee. It is preferable from 
the trustee’s viewpoint that the requirement of the mortgage 
be specific; if, however, the matter of transfer is optional with 
the trustee, its action will be controlled by the standing of 
the mortgagor and other circumstances surrounding the trust. 


Nominees of trustee.— The practice of permitting registra- 
tion of pledged securities in the names of nominees rather 
than the name of the company or the trustee is largely due 
to the greater difficulty of effecting the transfer of securities 
registered in the name of a corporation or a fiduciary. ‘The 
nominee is required to execute an assignment of the securities 
and to surrender possession thereof promptly upon completion 
of the transfer. Good trust company practice goes one step 
further and requires the execution by the nominee, as of the 
date of transfer, of a declaration of trust. Form 34 is an 


2'The reader should bear in mind that this chapter concerns only collateral 
pledged under mortgages as additional security. For provisions affecting col- 
lateral trust indentures, under which only stocks, bonds, or other intangible 
security is pledged, see Chapter XII. 


130 WORK OF CORPORATE TRUST DEPARTMENTS 


example of such a declaration. In cases where a nominee 
who is an employee of the trustee leaves its employ the trustee 
should carefully consider the advisability of transferring the 
securities to another nominee. All holdings of nominees 
should be recorded on nominee cards (Form 35), so that 
notices, dividends, etc., sent to the nominee may be readily 
traced to the proper account. 


Form 34.—Declaration of Trust. 
~DECLARATION 


THIS IS TO DECLARE that Certificate — No. for shares of 
Stock of the issued in my name was not purchased with funds belonging 
to me, and the said Certificate is not my property either directly or indirectly, 
but is subject to the control of Bankers Trust Company and has been 
assigned and delivered to it prior to the execution of this Declaration. 


I further declare that I never have had, and do not now have any personal 
or beneficial interest in said Stock, and that the dividends thereon or the rights 
in respect thereof, if any, as well as any proceeds arising from the sale thereof 
do not in any manner belong to me, but are subject to the order and control 
of said Trust Company. 


WITNEss MY HAND AND SEAL THIS —— day of 19—. 


[E.$.] 
Signed in the presence of: 


Form 35.—Nominee Card 


NOMINEE 


FOR ACCOUNT OF No. OF SHARES AMOUNT 


S 


ce 


Mg 
I 
eee 


PAR DATES 
%, VALUE PAYABLE ToTat | $ 


PLEDGED SECURITIES; RELEASES: ETC. 181 


Directors’ shares.— There is usually contained in this article 
of a mortgage authorization to the trustee to do whatever may 
be necessary to maintain or to extend the corporate existence 
of any corporation, all or a part of whose stock may be 
pledged under the mortgage, and further authorization to 
the trustee to use, or to permit the company to use, a sufficient 
number of shares to “qualify” directors or officers of such 
corporations where the law or the corporation’s by-laws 
require officers or directors to be stockholders. The usual 
practice, after such transfers for qualifying purposes, is to 
require the directors or officers to endorse their respective 
qualifying certificates and to redeliver them to the trustee. 


Pledge subject to other mortgages.— Especially in the case 
of refunding mortgages, securities frequently are pledged, 
subject to prior pledge under existing senior mortgages. Un- 
der such circumstances actual delivery of the securities can- 
not be made to the trustee of the junior mortgage until the 
securities are released from the prior lien, in accordance with 
the terms of the latter, usually only upon the satisfaction 
and discharge of the senior mortgage. ‘The junior trustee 
promptly upon execution of the junior mortgage pledging 
securities subject to a prior lien, should serve formal notice 
of such pledge upon the senior trustees and demand that the 
senior trustees upon release of the securities from the senior 
liens shall deliver the securities to it under the junior mort- 
gage, rather than to the company or to any other party other- 
wise entitled thereto.* 


Dividends and interest.—With but few exceptions mort- 
gages which cover pledged securities provide that, in the 
absence of default, the mortgagor shall be entitled to receive 
and use, without restriction, all interest and dividends paid 
on the pledged securities. In the case of coupon bonds it is 
usually provided that the coupons as they mature shall be 
detached and delivered to the company. Registered securities, 
if standing in the name of the company or its nominee, require 
no action by the trustee. If, however, the registered securities 
are in the name of the trustee or its nominee, the trustee will 
be called upon to deliver all necessary dividend or interest 


3Item XI of the Mortgage Examination Guide, p. 31, covers this point. 


182 WORK OF CORPORATE TRUST DEPARTMENTS 


orders in favor of the company or its nominee. In the event 
of a default under a mortgage covering pledged securities, one 
of the first duties of the trustee is to review the condition of the 
pledged securities, to arrange for a prompt transfer to its 
name of any securities not so transferred, and to cancel all 
outstanding interest or dividend orders in favor of the com- 
pany. During the existence of a default the trustee should 
collect and hold as a part of the trust estate all payments on 
account of the pledged securities. 


Payment on account of principal.—Practically all mort- 
gages of this kind provide that payments on account of the 
principal of pledged obligations, or dividends on pledged 
stock which are of the nature of capital distributions or 
liquidating dividends, shall be payable to the trustee and not 
to the company, and shall be held by the trustee until applied 
by the company for purposes set forth in the mortgage. It 
is usual for the mortgage to permit such funds to be repaid 
to the company to reimburse it for capital expenditures of the 
nature authorized as the basis of an application (1) for addi- 
tional bonds, or (2) for the withdrawal of the proceeds of 
released property.* Sometimes the company, may, at its op- 
tion, add such funds to an existing sinking fund or require 
the trustee to apply the funds to the redemption of outstand- 
ing bonds. 


Voting pledged stock.—Following the principle outlined in 
respect of income on pledged securities, it is generally pro- 
vided that, in the absence of default, the mortgagor shall 
have the right to vote the pledged stock at stockholders’ 
meetings, but subject to certain logical restrictions. Again, 
as in the case of dividends, no action is required of the trus- 
tee, unless the securities are registered in its name or in that 
of its nominee. If so registered it is usual for the mortgage 
to provide that, unless a default exists, the trustee shall, on 
the written application of the company, deliver to it or on its 
order all necessary proxies to permit the company to vote the 
pledged securities. 

The usual restrictions on the exercise of voting power in 
respect of pledged stock are such as to prohibit: 


4 These provisions are discussed on pages 93 and 139, respectively. 


PLEDGED SECURITIES; RELEASES; ETC. 133 


1. Any increase in the indebtedness of the company, the 
stock of which is voted, unless provision is made for the de- 
posit of the full amount of such increased indebtedness as 
additional security under the mortgage. 

2. Any increase in the capital of the company the stock 
of which is voted, unless provision is made for the deposit 
under the mortgage of a proportionate amount of the new 
stock; so that, after the increase, the trustee shall hold no 
smaller proportion of the entire capital stock than it did be- 
fore such increase. 

3. In the case of certain subsidiary or controlled com- 
panies, where a voting control or substantial control is repre- 
sented by the stock originally pledged, any increase in the 
securities having a voting right unless provision is made that 
the percentage of voting control represented by the pledged 
stock shall not be diminished. 

4. Any action to surrender the company’s franchise, or to 
terminate its corporate existence, except with the assent of 
the trustee. 


Proxy limitations.—In executing proxies covering pledged 
securities, it is good practice for the trustee to give proxies 
which are limited to certain expressed purposes, as, for ex- 
ample, the election of directors, or, if it is necessary to give 
a full power, to refer in the proxy to the mortgage and pro- 
vide that the proxy shall not be voted for any purpose in- 
consistent with the provisions of the mortgage. 

Even though the mortgage may not specify the form of the 
company’s application to the trustee for the execution of 
proxies, it is appropriate for the trustee to require a certified 
copy of a resolution of the directors of the company author- 
izing each request, or a general resolution of the directors, 
authorizing certain officers of the company to make such re- 
quests. 

During the existence of default it is the rule for the trustee 
itself to exercise the voting power. 


Subsidiary or controlled companies.—In the case of mort- 
gages where all or a part of the pledged stock represents 
the mortgagor’s interest in certain subsidiary or controlled 
companies, such interest being a substantial factor in the com- 
panies financial or industrial position, it is usual to find most 


1384 WORK OF CORPORATE TRUST DEPARTMENTS 


stringent and detailed provisions as to the voting rights on the 
stock, particularly in the event of the merger of any of such 
companies, either with the mortgagor or with other sub- 
sidiary or independent companies; or in the event of their 
reorganization. 


Protection of pledged stock.—Many indentures which con- 
template the deposit of stock as collateral provide that in 
case a majority of the stock of a corporation is pledged no 
part thereof may be released which would reduce the amount 
pledged below 51 per cent of the capital stock of such cor- 
poration, unless all of its stock is simultaneously sold and re- 
leased. The obvious reason for this provision is to continue 
in the trustee, once it is obtained, the voting control of any 
corporation, all or a part of whose stock is pledged. 


Reorganization or merger.— Under the more modern mort- 
gages the trustee is often given a wide discretion to act for 
the best interests of the bondholders in the event of reorgan- 
ization, consolidation, or merger, affecting a company whose 
securities, in whole or in part, are pledged under the mort- 
gage. ‘The well-drawn mortgage always takes into consider- 
ation the possibilities of merger or reorganization, and the 
careful draftsman endeavors to insert provisions broad enough 
to cover all contingencies which reasonably can be foreseen. 
The discretionary powers of the trustee in this direction are 
checked by such restrictive provisions as may be deemed neces- 
sary for the protection of the trust estate. 


Release of portions of mortgaged property.— After the re- 
cording of a mortgage in the various jurisdictions in which 
the mortgaged property is located, and pending the final 
discharge and satisfaction of the mortgage, the property cov- 
ered can be conveyed only subject to the lien of the mortgage, 
unless there is recorded in the jurisdiction in which the prop- 
erty to be conveyed is located an instrument executed by the 
trustee releasing, from the lien of the mortgage, the trustee’s 
right, title, and interest in and to the property to be con- 
veyed.’ As such instruments cover a part only of the mort- 
gaged property they are generally referred to as “partial 
releases,’ to distinguish them from the instrument of release 


5 Reference is made to Article VIII of the typical mortgage (page 368). 


PLEDGED SECURITIES; RELEASES; ETC. 135 


or satisfaction executed by the trustee upon the final payment 
of the debt secured by the mortgage, completely to discharge 
the lien of the mortgage. 


Purpose of release provisions; restrictions imposed.— 
A corporation would find a mortgage a severe handicap if 
during the life of the mortgage, it were unable to sell and give 
good title to any part of the mortgaged property. As a con- 
sequence, practically all mortgages contain provisions which 
permit property no longer necessary or advantageous in the 
proper operation of the company’s business to be released, 
upon certain conditions, from the lien of the mortgage. It is 
customary to require that the proceeds of sale of any property 
so released shall be deposited with the trustee. 


Some mortgages contain special provisions which have par- 
ticular reference to the type of business carried on by the 
debtor. For instance, the release clauses of most railroad 
mortgages contain a restriction to the effect that no property 
shall be released if thereby the continuity of the line of rail- 
road would be broken. A similar restriction is applied to 
transmission lines in power company mortgages. Mortgages 
on properties of industrial and other concerns using a con- 
siderable amount of machinery and equipment often specially 
authorize the sale by the company, without release by the 
trustee, of such machinery or equipment as is no longer neces- 
sary in the operation of the business, on the condition that 
such property is replaced by other property of at least equal 
value. In some mortgages of this kind the debtor company 
is required to account periodically to the trustee for such sales, 
and in other mortgages a limit is placed on the amount of 
property which may be sold annually without release by the 
trustee. Some mortgages permit the mortgagor to make all 
necessary alterations to its operating property such as plant, 
transmission lines, or lines of railroad, not including changes 
in its real estate holdings, without obtaining from the trustee 
a formal release of the property replaced in the course of 
such alterations. 


The release of a very large part of the property might so 
affect the character of the mortgaged premises that subse- 
quent sale of the bonds would constitute deceit or misrepre- 
sentation. In such cases a supplemental indenture may be 


136 WORK OF CORPORATE TRUST DEPARTMENTS 


advisable, pursuant to which the outstanding bonds would 
have to be deposited with the trustee and an appropriate en- 
dorsement stamped thereon. In examining into any large re- 
leases the trustee should keep this possibility in mind. 
Before executing any release the careful trustee should com- 
pare the detailed description of property appearing in the 
release with the description given in the company’s application, 
so that no property will be released except that formally ap- 
plied for by the company pursuant to the mortgage provisions. 


Conditions of release.—In some few mortgages it is possi- 
ble to determine in advance the consideration which the trustee 
must receive when releasing property. For example, a mort- 
gage on property of a real estate development can very well 
identify the plots by number and specify the amount to be 
deposited with the trustee for each plot released. However, 
such mortgages are exceptions; as a rule, it is necessary to 
draft elaborate provisions which must be complied with be- 
fore the trustee is authorized to execute any release of prop- 
erty. 

The typical provisions of a mortgage in respect to the 
release of property are: (1) that the property to be released 
shall not be necessary or advantageous in the operation of the 
business of the mortgagor; (2) that the company has sold 
or exchanged, or has contracted to sell or exchange, the prop- 
erty for a consideration of at least equal value; (3) that the 
consideration shall be paid or conveyed to the trustee; and 
(4) that the company shall make written application to the 
trustee, in the form prescribed by the mortgage, for such re- 
lease making the showing as to facts required by the mortgage. 


Form of mortgagor’s application.— The form of applica- 
tion differs widely with each mortgage. In the older mort- 
gages it was common to require merely a resolution of direc- 
tors, but the right to obtain the release of property was often 
rather closely restricted. ‘The more modern mortgage is 
apt to be much more liberal in its right of release; but, on the 
other hand, it is much more exacting in its requirements as to 
the showing necessary to obtain a release. For example, 
one modern mortgage permits the release of any part of the 
mortgaged property but requires the following to support the 
application: 


PLEDGED SECURITIES; RELEASES; ETC. 137 


1. A certified copy of a resolution of the board of directors 
or executive committee of the mortgagor stating the facts as 
to the sale or agreement to sell, and authorizing the applica- 
tion for release. 

2. A certificate in affidavit form by the president or any 
vice-president and by the chief engineer, treasurer, or any 
assistant treasurer stating: 


(a) That the property to be released is no longer neces- 
sary or advantageous in the proper operation of the business 
of the company. 

(b) That the company has in good faith sold or has con- 
tracted to sell the property for a specified consideration. 

(c) That, in the judgment of the officers, the consideration 
to be received is of a value to the company at least as great as 
the value of the property to be released. 

(d) If the consideration is to be other than money a full 
detailed statement of such consideration. 

3. If the consideration is to be other than money, an opin- 
ion of counsel that, upon completion of the transaction, the 
company will acquire good title to the property comprising 
the consideration, and that such property will, without further 
action by the company or the trustee, become subject to the 
lien of the mortgage; or, if further action is required to sub- 
ject the new property to the lien of the mortgage, approval 
of the form of such instruments as may be necessary for that 
purpose. | : 

4. If the stated value of the property to be released exceeds 
the sum of $100,000, an appraisal by an independent engi- 
neer or appraiser, selected by the company and approved by 
the trustee, of the value of the property to be released and 
of the consideration to be received. 

5. Delivery of the consideration to the trustee, simultane- 
ously with the delivery of the release. 

It is apparent from the above that, while authority 1s 
granted for the release of any part of the mortgaged prop- 
erty, great care was taken, in drafting the provisions author- 
izing releases, to prevent possible loss to the trust estate 
through such transactions. 


Substitution of property on “utility” basis.—Some of the 
modern mortgages provide that property substituted for prop- 


138 WORK OF CORPORATE TRUST DEPARTMENTS 


erty released must have a value or utility at least equal to 
that of the property released. A somewhat comparable 
provision is contained in the ‘“Telephone” mortgage.® ‘The use 
of utility as an alternative for value, particularly in the case 
of public utility mortgages, is becoming more common, and, 
while, from a broad point of view, the provision is undoubtedly 
wise, it can be safely used only in the case of a company of 
financial strength and capable management, as the dollar 
value of the mortgaged property might be materially reduced 
through a series of sales and replacements on a “utility” basis, 
if no regard were given to the values involved. 


Deferred payments.— Many of the newer mortgages make 
specific provision for the release of property on deferred pay- 
ment sales. In such a case the mortgage usually provides 
what percentage of the sale price must be paid in cash and 
also for a properly recorded assignment to the trustee of the 
purchase-money mortgage, and the deposit with the trustee of 
the notes or other obligations issued thereunder. In general 
this is a wise provision, as inability to sell against a reasonable 
purchase-money mortgage often mitigates against a possible 
advantageous sale of property no longer of real use to the 
company. 


Eminent domain.—Another provision now commonly 
found in mortgages is that covering the contingency of a part 
of the mortgaged premises being taken under the power of 
‘eminent domain.’ Frequently, property subject to a mort- 
gage will be required by a governmental body for public pur- 
poses, such as parks, roadways, and so on. In that event 
condemnation proceedings may be brought, or the govern- 
mental body may purchase the property in question, from the 
mortgagor. Some mortgages authorize the trustee, under 
these circumstances, to execute a release upon receiving an 
appropriate opinion of counsel acceptable to the trustee and 
upon deposit with the trustee of the moneys received as com- 
pensation for the property so taken or purchased. 


Abandonment of mortgaged property.— Due to changed 
conditions railroads sometimes find themselves burdened with 
mileage which is actually more of a liability than an asset. 


® See page 369. 


PLEDGED SECURITIES; RELEASES; ETC. 139 


The development of automobiles and improvement of roads 
has forced the railroads, in many cases, to operate some of 
their mileage at a loss. Usually these unremunerative por- 
tions of the line are small branches which may be cut off 
without affecting the operation of the main lines. 

In a situation of this kind the railroad probably will ap- 
proach the trustees of its mortgages on the subject of aban- 
doning the unremunerative mileage. If the railroad is applying 
to the Interstate Commerce Commission for authority to 
abandon the line in question the trustee probably will be con- 
tent to appear before the commission, state its position as 
trustee, and await the commission’s decision. Of course the 
trustee should not take any action in matters such as this with- 
out having its counsel approve each step. It should also see 
that the “scrap” value of the abandoned line is paid to the 
trustee of the senior mortgage on the line. 


Underlying lien.— In the case of mortgages which are sub- 
ject to underlying liens it is usual to provide that, if 
property released is subject also to an underlying lien, the com- 
pany shall deposit the proceeds of the release with the prior 
trustee in lieu of its obligation to deposit under the mortgage 
in question. Good practice dictates the policy of the junior 
trustee receiving a formal acknowledgment from the prior 
trustee that it has received the proceeds and will apply them 
in accordance with the provisions of the underlying mortgage. 


Application of proceeds.—As previously stated, most mort- 
gages require the deposit with the trustee of the proceeds of 
released property and also provide for the disposition by the 
trustee of such proceeds. If the consideration takes the form 
of property rather than cash, the property is held as a part 
of the trust estate. The following alternatives sometimes are 
given, as to the disposition of cash proceeds: 


1. Repayment to the company in reimbursement for the 
cost of additional property purchased and subjected to the 
lien of the mortgage, or for the cost of additions or better- 
ments, chargeable to capital, made to the mortgaged property. 
It is usual to provide that only such expenditures as are made 
after the date of the release may be the basis of such an ap- 
plication. 

2. Application, at the option of the company, to the re- 


140 WORK OF CORPORATE TRUST DEPARTMENTS 


demption of outstanding bonds in accordance with the terms 
of the mortgage, to the purchase of outstanding bonds at 
public or private sale, or on tender, or payment into the sink- 
ing fund for use as therein provided. Many mortgages pro- 
vide that if the company shall not apply the proceeds, within 
a specified period, say, one year, to the purchase of property 
or to additions or betterments, or in writing notify the trus- 
tee of its intention so to do, the trustee shall, without further 
action by the company, apply the funds to the redemption or 
purchase of outstanding bonds as provided in the mortgage. 
A provision of this kind requires careful watching by the trus- 
tee, and the date of each release should be carefully calen- 
dared so that the expiration of each period may be noted. 
Many trustees, as an act of courtesy to the mortgagor, notify 
it a month or so before the expiration of each period, so that 
the company may not be embarrassed through an oversight 
on its part. 


Release of property during receivership.— Most recent 
mortgages provide that the right of the mortgagor to apply 
for the release of property shall terminate with the happening 
of an event of default. Even though the mortgage does not 
contain such a provision, the diligent trustee will use extreme 
caution in the case of an application at a time when the mort- 
gagor is in default. While good policy dictates that the form 
of all applications for release should be submitted to counsel 
for the trustee for their approval, any application received 
during the existence of a default should be passed on by coun- 
sel with due consideration of the circumstances of the default 
and of the effect of the proposed transaction on the interests 
of the bondholders. 

Many modern mortgages contain a very wise provision that, 
during the existence of a default, the receiver of the company 
(if one has been appointed) shall have the right, with the 
consent of the trustee, to act in the place of the company in 
connection with the release of property, and if the trustee, 
upon default, shall have entered into possession of the mort- 
gaged property, it shall have the right, without action by the 
company, to release property from the lien of the mortgage, 
upon terms which, in its judgment, shall be in the interest of 


the bondholders. 


PLEDGED SECURITIES; RELEASES; ETC. 141 


Supplemental indentures.’—As may be inferred from the 
name, a supplemental indenture is an instrument, executed by 
the mortgagor, or by both the mortgagor and the trustee, to 
modify or add to the provisions of the mortgage under which 
it is executed. 


Supplemental indentures are created to accomplish a variety 
of purposes, among which are: 

1. To convey to the trustee, as additional security for the 
bondholders, property, real or personal, not previously sub- 
ject to the mortgage. This is by far the most common type 
of supplemental indenture, and usually is executed by the 
mortgagor only, as it is merely a conveyance in trust to the 
trustee. Such an indenture should be properly recorded. 

2. ‘To evidence the terms of new series of bonds, issuable 
under a mortgage providing for bonds in series. Supplemental 
indentures are not required or executed in all such cases, as 
many mortgages provide that the terms of each new series of 
bonds may be fixed by resolution of the directors of the com- 
pany. However, even in such cases, it is sometimes consid- 
ered better practice for the mortgagor and the trustee to 
execute a supplemental indenture, which is placed on record 
in the various public offices in which the mortgage is recorded.* 

3. To evidence the surrender by the mortgagor of one or 
more of its rights under the terms of the original mortgage, 
or the extension to the bondholder of some additional priv- 
ilege. 

To this point we have considered only supplements which 
in no way diminish the rights of the bondholders, consequently, 
the consent of the bondholders is not required or obtained. 

4. To evidence a change in one or more of the covenants 
of the mortgagor in the original mortgage. Such a change 
must always affect, to some extent, the rights of the bond- 
holders, and, therefore, the trustee should not join in the 
execution of such an indenture except upon the assent of the 
holders of all the outstanding bonds in any way affected by the 
proposed change. The assent of the bondholders is usually 


TSee the “Telephone” mortgage, page 389. 

8A supplemental indenture of this kind should be analyzed in the same 
manner as the original mortgage. See Mortgage Examination Guide, Form 1, 
page 30, and History of Trust, “half sheet” Form 2A, page 36. 


142) WORK OF CORPORATE TRUST DEPARTMENTS 


evidenced by the deposit of the bonds with the trustee, or 
other designated depositary, under an appropriate agreement 
or letter of instructions, authorizing the trustee to join in the 
execution of the proposed supplement and to place on the 
bonds themselves an appropriate endorsement. ‘The purpose 
of the endorsement is to put all subsequent holders of any of 
the bonds upon proper legal notice of the change in the terms 
of the original mortgage. 


While, in the absence of any provision to the contrary in 
the mortgage itself, the unanimous consent of the bondholders 
is required, there are exceptional cases under which a trustee 
for the good of the bondholders as a whole will join in the 
execution of such a supplement, provided the consent of sub- 
stantially all of the bondholders has been obtained, and pro- 
vision to the trustee’s satisfaction is made for the protection 
of non-assenting bondholders. 

Unanimous consent by bondholders to any change in the 
terms of a mortgage is most difficult to obtain, and this re- 
quirement presents an opportunity to the type of bondholder 
who attempts to secure personal profit from a chance to ob- 
struct. As a consequence, the more modern mortgages some- 
times contain a provision that supplemental indentures alter- 
ing the provisions of the mortgage, but making no change in 
the terms of payment of the outstanding bonds, may be ex- 
ecuted by the trustee and shall become effective upon the assent 
by the holders of a specified percentage, say, 85 per cent of 
the outstanding bonds. ‘This, it seems, is a very sensible pro- 
vision and one which, if generally adopted, would, in time, 
do much to make unprofitable the business of obstruction now 
pursued by a few investors who are not too scrupulous as to 
the source of their profit. 


CHAPTER X 
DEFAULTS AND REMEDIES 


“Events of default.”—So long as the financial life of the 
mortgagor runs smoothly, the corporate trust department has 
little or no interest in those sections of the mortgage’ which 
define the various “‘events of default” and the remedies avail- 
able to the trustee and the bondholders in case of default, 
such as the mortgagor’s failure to pay interest or principal 
on the bonds, to provide sinking fund installments, or to keep 
other covenants contained in the mortgage. However, as 
soon as a default occurs or is impending, the trustee should 
examine into the methods by which the remedies may be en- 
forced and discuss with its counsel a proper course of action. 


Because any action by a trustee under these provisions of 
a mortgage should be taken only after full consultation with 
counsel, and, further, because any discussion of the subject 
would be mainly legal in its scope, no attempt will be made in 
this book to do more than look into the practical aspects of 
the subject. Those readers who are interested in pursuing 
further this phase of corporate mortgages are referred to 
existing works by well-known attorneys. 


One of the best discussions, from the point of view of the 
trust officer, is found in the paper read by Mr. James Byrne 
before The Association of the Bar of the City of New York, 
entitled “The Foreclosure of Railroad Mortgages in the 
United States Courts,’ and, supplementing this, the lecture 
before the same body by Mr. Paul D. Cravath on “The Re- 
organization of Corporations; Bondholders’ and Stockhold- 
ers’ Protective Committees; Reorganization Committees; and 
the Voluntary Recapitalization of Corporations.” Both of 
these addresses have been published in “Some Legal Phases of 
Corporate Financing, Reorganization and Regulation” to 
which the authors have referred on several occasions. 


1 This reference is to the text of the “Telephone” mortgage, Article IX 
(page 372). 


143 


144, WORK OF CORPORATE TRUST DEPARTMENTS 


The following statement of Mr. Roberts Walker,’ relat- 
ing to the broader aspect of the subject, is also of interest: 


‘“These remedies [in event of default] ordinarily occupy a 
separate Article of from ten to twenty-five Sections, and de- 
fine the defaults—for example, failure to pay interest, failure 
to pay principal, failure to live up to covenants, or failure to 
keep out of a receivership—and provide a diversity of courses 
available to the trustee or bondholders when defaults occur. 
You will readily apprehend that lawyers have expended their 
most vigilant efforts in making the default provisions “‘leak- 
proof.’ According to the terms of the mortgage, the trus- 
tee may take possession of, and may operate, the mortgaged 
property, may declare the principal of the bonds due and re- 
cover a money judgment without more formality or red tape, 
may have its own receiver appointed forthwith, may sue for 
a foreclosure and sale, may sell of its own motion, or may do 
other things. In practice, the matter is by no means so easy 
as it sounds. Things have not changed greatly since 1897, 
when Moorfield Storey, Esq., of Boston, wrote: 


“The most skillful lawyers . .. have been engaged to 
draw mortgage deeds . . . with careful and explicit provi- 
sions defining the rights and remedies of the creditors in case 
of the debtor’s inability to pay its debt, authorizing them 
through their trustee to take immediate possession . . . and 
providing further for speedy foreclosure and sale. . . . It 
would be impossible . . . to draw instruments which were 
clearer or more carefully guarded than many of these agree- 
ments. 


“The last three years have shown us that these contracts 
cannot be enforced in the courts; that the rights which they 
are intended to secure are not recognized, and that for all 
practical purposes the creditor is at the mercy of the debtor. 

. As matters now stand, counsel must advise their clients 
that, they can draw no instrument of this character with the 
least assurance that its provisions will be respected.’ 

“Mr. Storey was writing, it is true, shortly after the panic 
of 1893, and in severe criticism of the so-called ‘friendly re- 
ceiverships’ into which so many corporations were thrown 
during that period. But his commentary is to-day even truer 


2“The Modern Corporate Mortgage.” 


DEFAULTS AND REMEDIES 145 


than in 1897, though for partly different reasons. In the 
last twenty or thirty years our courts have shown, paralleling 
the increasing magnitude of corporate security issues, an in- 
creasing tendency to deal with insolvent properties for the 
benefit of all strata of bondholders, creditors, and stockhold- 
ers. Only in most extreme cases is a trustee permitted to 
foreclose and thereby ‘freeze out’ the junior creditors and 
the stockholders. Arrangements whereby bondholders and 
stockholders agree to sell and reorganize without making 
adequate provision for intervening claimants are looked at 
askance. In the absence of any statute requiring reorganiza- 
tions to be conducted under judicial control, the courts are 
doing their utmost to prevent unfair reorganizations or harsh 
foreclosures even though trustees are within their legal rights 
and to delay their enforcement thereof is abstractly unjust— 
to the trustees and bondholders. So we must deem the de- 
fault clauses to be the most effective possible under existing 
circumstances. ‘The circumstances are no reflection on the 
scrivener’s ability, but show him and his mortgage as single 
factors among many weighty considerations.” 


Procedure of trustee.— Perhaps it would not be out of 
place to attempt here a very brief outline of the various steps 
taken by a trust department, following a default. In these 
matters the corporate trust department usually comes in close 
contact with the reorganization department;’ in fact, in many 
trust companies, reorganizations and similar kinds of business 
are in charge of a division of the trust department. 

If the default is in the payment of principal or interest it 
soon comes to the attention of the bondholders. In the case 
of other defaults one of the first questions which the trustee 
faces is whether to notify the bondholders. ‘This is a delicate 
problem and no set rule can be established, but the advisability 
of communicating with the bondholders should be carefully 
considered by the trustee and its counsel. Even should it be 
decided to do so it will often be found difficult to reach any 
considerable number of bondholders because, if the bonds are 
outstanding in bearer form, the trustee probably will have 
difficulty in ascertaining the names and addresses of the hold- 
ers. 


3 See Chapters XIV and XV, pages 187 and 206 respectively. 


146 WORK OF CORPORATE TRUST DEPARTMENTS 


The default may be of a nature entitling the mortgagor to 
a “period of grace,’ and, further, requiring the service on 
the mortgagor by the trustee, or by the holders of a designated 
percentage of bonds, of a formal notice, specifying the de- 
fault, so as to set running this period of grace. ‘The provi- 
sions of the ‘“Telephone”’ mortgage are typical (see Article IX, 
Section 2 (c), page 372). In that mortgage the period speci- 
fied is 90 days and the notice to the mortgagor may be given 
by the trustee in its discretion, but shall be given at the direc- 
tion of the holders of 25 per cent in amount of the outstand- 
ing bonds. ‘The period stipulated after due service of notice, 
as required, must elapse before the trustee may‘declare the 
principal of all bonds to be immediately due and payable or 
otherwise proceed to the enforcement of the remedies pro- 
gided by the mortgage. 

Usually, before matters have progressed very far, some of 
the larger bondholders (and probably the bankers who sold 
the bonds) get together and organize what is known as a pro- 
tective committee. This committee will come to a trust com- 
pany, often the trust company which is acting as trustee, and 
request it to act as depositary under a protective or deposit 
agreement.’ Such an agreement is entered into between the 
protective committee, and the holders of such bonds as may 
be deposited thereunder. The agreement defines the author- 
ity which the committee shall have in acting for the bondhold- 
ers, provides for the payment of the compensation and ex- 
penses of the committee, and contains provisions for protect- 
ing the interest of depositing bondholders. Acting under this 
agreement the committee attempts to work out the financial 
dificulty and, perhaps, to reorganize the company. It some- 
times happens (unfortunately in but comparatively few cases) 
that the committee is able to relieve the situation without 
actual foreclosure. In most cases, however, the committee 
has to decide upon foreclosure, preliminary, as a rule, to a 
complete reorganization. In this event, it usually instructs 
the trustee to proceed to foreclose the mortgage, and, on be- 
half of the bondholders who have deposited under the agree- 
ment, gives formal instructions to that effect, offering the 
trustee indemnity as required by the mortgage, for its ex- 


4 Chapter XIV, page 187, contains a more complete discussion of the provi- 
sions of a deposit agreement. 


DEFAULTS AND REMEDIES 147 


penses and liabilities. ‘This indemnity, almost without excep- 
tion, is given by the committee as a committee and not in- 
dividually, and is often secured by the pledge of all of the 
deposited bonds. ‘This form of indemnity is satisfactory, 
however, only if the deposit agreement contains the customary 
provision giving the committee the right to pledge the de- 
posited bonds, and if, in the judgment of the trustee, the 
probable recovery on’ the deposited bonds will be sufficient 
‘to equal its liabilities, disbursements, and fair compensation. 
In some cases the trustee will require a surety bond or the 
pledge of other security. During the progress of the fore- 
closure proceedings, it is usual for counsel for the trustee 
to confer with counsel for the bondholders’ committee, and, 
so far as is compatible with the interests of the bondholders 
as a whole, to work in harmony with the committee. The 
extent to which the trust company will endeavor to meet the 
wishes of the committee is largely dependent upon the per- 
centage of bonds represented by the committee and whether 
there is any organized minority of bondholders. 


Sale under foreclosure.—Provided a reorganization has 
been determined upon, it is customary for the bondholders’ 
committee (directly or through an intermediary) to bid for 
the property at the foreclosure sale and to offer in payment 
(1) the deposited bonds, in the proportion to which they 
will be entitled to share in the net proceeds of the sale; and 
(2) cash for the balance. It is then usual for the committee 
to organize a new corporation, issue the securities of the new 
corporation in exchange for the properties of the old, giving 
to the holders of junior securities such recognition as, in their 
judgment, the equities justify. The treatment of the junior 
security-holders is important, as the courts have adopted the 
policy of carefully scrutinizing this part of a reorganization 
plan, and are inclined to give a sympathetic hearing to the 
holders of junior securities who can show that they have not 
been equitably treated in the plan. 

After the sale, the deposited bonds are stamped with an 
endorsement showing the payment on account out of the pro- 
ceeds of the sale, and are returned to the committee, although, 
in certain circumstances, with the approval of the court, stamp- 
ing of the deposited bonds may be avoided by having them 


148 WORK OF CORPORATE TRUST DEPARTMENTS 


canceled by the trustee and its receipt given to the committee. 
It is sometimes possible—provided the court approves—to 
solve the problem of disposing of the deposited bonds by 
having them canceled and one temporary bond for the entire 
amount issued to the committee. 

As a formal step, the trustee will obtain a deficiency judg- 
ment for the unpaid balance due on the bonds.’ For the 
deficiency the bondholders will rank equally with the unse- 
cured creditors of the company as to any unmortgaged assets. 
A receivership nearly always accompanies a foreclosure, and, 
if there are substantial unmortgaged assets, the bondholders 
will receive on the deficiency judgment a further dividend from 
the receiver’s sale. The bonds, if paid in full, are then can- 
celed. Unfortunately, however, full payment seldom results. 
The deficiency judgment gives to the trustee the right to par- 
ticipate on behalf of the bondholders in any further assets 
of the company which may be discovered later. 


Junior security-holders.—Reference has been made to the 
treatment of the equity security-holders. In the earlier days, 
when a first mortgage was foreclosed, the result was nearly 
always the complete wiping out of ‘he stockholders, and, in 
some instances, of the junior bondholders. ‘To-day, because 
of the change in the attitude of the courts, which has already 
been mentioned, it is usual for the first mortgage bondholders’ 
committee to give the junior security-holders an opportunity 
to offer a plan of reorganization. If the junior security-hold- 
ers fail to do so, the first mortgage bondholders, after care- 
fully analyzing the situation, prepare a plan and offer therein 
such treatment of the equity represented by the junior security- 
holders, as they believe to be fair and likely to meet the 
approval of the court. Almost any reorganization involves 
the raising of cash, and the burden of providing it is prac- 
tically always placed on the junior security-holders. 


Activities during foreclosure proceedings.—During the 
foreclosure proceedings the trustee will be called upon to 
sign various notices and petitions, including the trustee’s bill 


5 This states the procedure generally, but in New Jersey, for example, a 
trustee under a corporate mortgage cannot, on foreclosure, obtain a deficiency 
judgment. 

In bankruptcy the bondholder and not the trustee is regarded as the 
creditor, and should prosecute any claim for deficiency. 


DEFAULTS AND REMEDIES 149 


of complaint in foreclosure. Perhaps, through one of its 
officers, it will be necessary for the trustee to testify in the 
foreclosure proceedings. Eventually it will join in the deed 
by which title to the property passes to the purchasers. In 
all these matters, however, the trustee should secure the ap- 
proval of its counsel before taking action. 


Computation of amount due.—The trust department, in 
connection with the preparation of the bill of complaint in 
foreclosure, and also at the time of the entry by the court of 
the order of distribution on foreclosure probably will be called 
upon to figure the amount due for principal and interest on 
the bonds. The following example illustrates the calculation 
in one instance. The laws of the various states relating to 
usury and the compounding of interest often affect the method 
of figuring interest on the debt, and counsel’s approval of the 
method used should be secured in each case. In the following 
illustration the bonds carried 6 per cent interest which had 
been paid to April 1, 1921. The company had defaulted on 
one of its covenants under the mortgage. On the application 
of creditors a receiver was appointed on July 15, 1921, and, 
on the same date, at the request of holders of the specified 
percentage of bonds, the trustee declared the bonds due and 
payable. The order of distribution on foreclosure was entered 
by the court on July 16, 1923. 


NEW YORK COMPANY, INC., lst MORTGAGE 6% 
10-YEAR GOLD BONDS 


1. Principal due July 15, 1921, by declaration of the trustee.... $4,168,500.00 
2. Interest thereon from April 1, 1921, to July 15, 1921 (3 


months and 14 days at 6% on a 360-day basis) ........... 72,254.00 
3. Interest on principal from July 15, 1921, to July 16, 1923 
Cra ay sat 601 Oia OO5-day |DASIS ii s.'% ae lwee's ween wee aie 500,905.23 


4. Interest on interest accrued and unpaid on July 15, 1921, 
from that date to July 16, 1923 (731 days at 6% on a 365- 
VD ASIS JU Oe Seales bites wins wan o's) g @ hile Side sv olalswiesd ela ata 8,682.36 


mae otal amount Ges bly 16,0 1925. 5 iis ey ake a ale wis a a Swine Oo ateiale $4,750,341.59 


The court, in its final decree of foreclosure and order of 
distribution, will fix the amount payable upon the outstanding 
bonds, out of the net proceeds of the foreclosure sale, and 
direct payment accordingly. The payment is sometimes made 
by a special master or other officer appointed by the court 
in the proceedings; in other cases the court will authorize the 


150 WORK OF CORPORATE TRUST DEPARTMENTS 


deposit of the necessary funds with the trustee and direct 
it to make the distribution. 

Final decree and order.--In the event of the purchase of 
the mortgage property by the bondholders’ committee, the 
committee will have tendered the deposited bonds in part 
payment of the purchase price and cash for the balance. 
Among other things the final decree and order will fix the 
expenses of the foreclosure and will direct, first, the payment, 
in cash, of such expenses; second, the acceptance on account of 
the obligation of the purchaser, of deposited bonds to the ex- 
tent of their pro rata share in the net proceeds of the sale; 
and, third, the distribution of the balance of the cash pro- 
ceeds in the payment of the pro rata share of the undeposited 
bonds in the net proceeds of the sale. The amount of moneys 
applicable to undeposited bonds, when paid over to the trus- 
tee, should be set aside by the trustee in a separate fund 
awaiting presentation of such bonds. 

The decree and order will further provide for the endorse- 
ment on both the deposited and undeposited bonds of a legend 
to evidence the payment. If the distribution constitutes full 
payment of the debt represented by the bonds, their cancella- 
tion probably will be directed, otherwise the decree and order 
will direct the return of the bonds to the holders after appro- 
priate endorsement. The following is an example of such an 
endorsement: 


Paid on account of the principal of and interest on the within bond the sum 
of $217.37656, being its pro rata share of the proceeds of the mortgaged prop- 
erty sold on September 14, 1923, by virtue of an Amended Foreclosure Decree 
entered nunc pro tunc as of July 26, 1923, in the Consolidated Cause in the 
District Court of United States for the Southern District of New York entitled 
“National Trust Company, as Trustee, Plaintiff, against New York Company, 
Inc., Defendant, in Equity No. 1234. 


Dated 


CHARLES H. GRAVES 
Special Master 


Final distribution.— The payment of subsequent distribu- 
tions, if any, is likewise evidenced by appropriate endorsement 
upon the bonds. When the final payment has been made 
it may be preferable, in place of stamping and returning the 
bonds to their respective owners, to cancel and hold them 
for cremation. In that event the trustee’s receipt would be 
issued to the bond owner. This method should be adopted, 


DEFAULTS AND REMEDIES 151 


however, only with the approval of the court. The reasons 
which may make this procedure desirable are: (1) to save 
the insolvent estate the expense which is incident to stamping 
bonds; and (2) to make it impossible for anyone to efface 
the stamp and, perhaps, sell the bond to some unsuspecting 
person. 


Disposition of endorsed bonds.—One of the annoying re- 
sults of many reorganizations is that the committee often 
requests the depositary or the trustee to hold the endorsed 
bonds in the hope of further recovery which is extremely 
remote. In time, the committee disbands and its members 
die or become unfamiliar with the details of the reorganiza- 
tion, and a number of years later, when the trust company 
desires to clear its vaults of a large accumulation of these 
bonds, it finds no one qualified to give it instructions. The 
modern trust company is very careful, upon completion of 
each reorganization, to secure explicit instructions, so that 
within a reasonable time it may be freed of the burden of 
carrying these practically worthless bonds. 


General.— In closing this chapter it may be well to repeat 
that, while every careful trust company makes it a point 
before accepting a corporate trusteeship to satisfy itself 
that the mortgagor is organized in good faith and has 
at least a reasonable chance of success, the trustee in no way 
gives any assurance that the bonds will be paid, or makes any 
warranty as to the financial standing of the mortgagor. Un- 
fortunately, it is true that some investors purchase bonds rely- 
ing upon the standing of the trustee, and, however unfounded 
this theory may be, they feel that some blame must attach to 
the trustee in case the mortgagor fails. This feeling is never 
more evident than in the trustee’s correspondence following 
a default, and emphasizes the need for careful investigation 
before the acceptance of any corporate trusteeship. If, in re- 
plying to such criticism, a trustee will be at some pains to 
make its status in this regard entirely clear, it will not only be 
defending its own good name, but will be doing its part in 
the very necessary work of educating the investing public. 


CHAPTER XI 


THE TRUSTEE CLAUSES; MISCELLANEOUS 
PROVISIONS 


Acceptance of trust.—The article “Concerning the Trustee” 
usually opens with the statement that the trustee accepts 
the trust under the terms and conditions stipulated in the 
mortgage. Following this, come the so-called “protective” 
clauses. 


Examining the protective clauses.— In the course of his ex- 
amination of the draft of a mortgage the careful trust officer 
will give particular attention to any provisions relating to 
the duties and responsibilities of the trustee. These will 
be found at different points throughout the mortgage, but it 
is customary to group under one heading a statement of the 
many things in respect to which the trustee shall not be liable.’ 
The trust officer will wish to have these protective clauses 
broad enough to cover all matters in which, judging from 
the experiences of his company and fiduciaries generally, the 
trustee should assume no liability. Some trust companies go 
so far as to prepare printed copies of a standard article 
of this kind, to meet their particular requirements, which 
they endeavor, whenever possible, to have incorporated ver- 
batim in the proposed mortgage. 


Liability of trustee.—Anyone inexperienced in corporate 
trust practice, after reading the “protective” or “immunity” 
clauses in any modern mortgage would very naturally assume 
that the liability or risk assumed by a trust company as 
trustee under such an instrument was slight, to say the least. 
Ig is true that these provisions have been gradually evolved 
by the ablest of trust company counsel to limit, so far as ts 
possible, the liability of trust companies as trustee. In reach- 
ing anything like a clear conception of the situation, however, 
the law and the attitude of the courts must be considered, 


1 This reference is to the text of the “Telephone” mortgage (p. 384 et seq.). 


152 


TRUSTEE CLAUSES; MISCELLANEOUS 153 


and here we find a very different situation. The law has 
always held a fiduciary to a very strict accountability for his 
acts. ‘The trust company of to-day has far-reaching sources 
of information and a broad experience, and the courts are 
inclined to deal even more strictly with a trust company than 
with an individual as trustee. Consequently, the situation is 
far from being as secure, from the trust company’s point of 
view, as it would seem from a consideration, merely, of the 
protective provisions. 


Purpose of immunity clauses.—The fact of the matter is 
that trust company counsel have attempted to write into the 
corporate mortgage, for what they may be worth, every pos- 
sible safeguard against risk attendant upon all action required 
of the trustee, except acts of bad faith. But the trust officer 
who goes ahead blindly relying upon these provisions is cer- 
tain, sooner or later (probably sooner), to cause his company 
financial loss and at the same time to bring about a serious 
loss to its prestige. 

The situation may perhaps be summarized somewhat as 
follows: first, the trust company before the execution of the 
mortgage should see that the broadest possible protective pro- 
visions are inserted; second, throughout the administration 
of a trust, whenever a question of responsibility or liability 
of the trustee arises, it should carefully examine the protective 
clauses and endeavor to proceed in conformity with all per- 
tinent provisions; and last, but most important of all, the 
trustee should never overlook the fact that these provisions 
are not necessarily conclusive, and, therefore, all doubtful 
questions should be passed upon by counsel before action 1s 
taken. 


Economics of situation.—The whole problem of responsi- 
bility under a corporate mortgage, in the last analysis, re- 
solves itself into a question of compensation. ‘Theoretically 
the trustee ought to have an active supervision of the trust; 
but practically the liabilities which in such case it would assume 
would be altogether out of proportion to the compensation 
which mortgagors are able or willing to pay.” ‘The modern 


2Francis Lynde Stetson, “Some Legal Phases of Corporate Financing, Re- 
organization and Regulation,” p. 52. 


154 WORK OF CORPORATE TRUST DEPARTMENTS 


trust company has an experienced staff and employs able 
counsel, and, if the mortgagor is willing to pay the expense 
and the bankers who underwrite the issue and usually select 
the trustee are willing that it should do so, the trust company 
is really equipped to assume a materially greater responsi- 
bility than is now the general practice. A number of trust 
oficers and trust company counsel feel that a greater measure 
of safety for the bondholder, both before and during reor- 
ganization, could be secured if the trustee was authorized 
to perform more active duties. The problem, however, re- 
mains one of policy with the bankers, and of economy and 
dislike of outside supervision on the part of the debtor cor- 
porations. 


Customary provisions.—Some of the points usually cov- 
ered in the article under discussion are as follows: 


The trustee shall have no responsibility for the proper re- 
cording, filing or refiling of the mortgage, and may certify 
and deliver bonds prior to recording or filing.® 

The trustee is entitled to reasonable compensation for all 
of its services (not limited to the compensation of trustees of 
an express trust as provided by law) and to reimbursement 
for all of its proper expenses, including the services of its 
counsel and agents, and, for such compensation and expenses, 
as well as for any liability which it shall properly incur, the 
trustee is given a lien on the trust estate, prior to the lien 
of the bonds. 

The trustee shall be fully protected in any action which it 
may take pursuant to any proper instrument, which it believes 
to be genuine. 

Any action taken by the trustee pursuant to authority from 
a bondholder shall be binding upon all future holders of the 
same bond or of any bond issued in exchange therefor. 

In the administration of the trust the trustee may, at the 
.,.expense of the mortgagor, consult with counsel, and be pro- 
yrected for any action taken in good faith in accordance with 
A! the opinion of such counsel. 

The trustee may also, at the expense of the mortgagor, 
employ all necessary attorneys, agents, or employees, and 


3 However, see dicta in Green v. Title Guarantee and Trust Company, 123 
Misc. (N. Y.) 731. | 


TRUSTEE CLAUSES; MISCELLANEOUS 155 


shall not be answerable for their misconduct if they are 
selected with reasonable care. 

The trustee shall not be liable for the exercise of any dis- 
cretion or power granted to it by the mortgage, nor for 
anything except willful misconduct or gross negligence. 

The trustee shall not be liable for the use of any bonds 
properly delivered under the mortgage, or for the applica- 
tion by the company of the proceeds thereof. 

All recitals, except the trustee’s certificate, shall be taken 
as made by the mortgagor and not by the trustee. 

The trustee assumes no responsibility for the validity of 
the mortgage or of the bonds or for the security therein 
provided. 

The trustee may become a bondholder with the same rights 
as though it were not trustee. 

The trustee shall not be required: (1) to take any action 
to enforce the trusts under the mortgage, which in its judg- 
ment might involve it in expense or liability, unless indemnified 
to its satisfaction by one or more of the bondholders; nor 
(2) to take notice of any default, until notified in writing 
by the holders of a specified percentage of the outstanding 
bonds; nor (3) to take any action in respect of a default 
until requested in writing so to do by the holders of a specified 
percentage of the outstanding bonds and indemnified to its 
satisfaction. It is usually stated, however, that these provi- 
sions are for the protection of the trustee, and do not affect 
any discretion or power which the trustee may otherwise have. 

The trustee need not recognize any person as a bondholder, 
until the bonds are presented for inspection to the trustee, 
and the title thereto, if disputed, established to the satisfac- 
tion of the trustee. 

If the trustee, pursuant to the terms of the mortgage, shall 
enter upon or operate all or any part of the mortgaged prop- 
erty it shall not be individually responsible for any debt or 
liability incurred. 

It shall be no part of the duty of the trustee to see to the 
payment of any tax or other charge against the mortgaged 
property, nor to see to the insurance or maintenance. 

Without intending to detract from the importance of any 
of the provisions just referred to, it might be well to invite 
particular attention to two very practical points affecting the 


156 WORK OF CORPORATE TRUST DEPARTMENTS 


trustee which frequently are covered in this part of the 
mortgage. 


Reliance upon certificate.—It is desirable, in dealing with 
all matters where the mortgage does not make specific pro- 
vision as to the evidence upon which the trustee may rely in 
acting under the mortgage, or in refraining from acting, that 
the trustee should be permitted to rely on a certificate of the 
company executed in a given manner, for example, by two 
specified officers of the company under its corporate seal. 
This provision is most important from the viewpoint of the 
trustee and is, at times, of material assistance in meeting a 
situation which otherwise might be most embarrassing. 


Interest on cash balances.— Provision is usually made for 
the payment of interest by the trustee on funds in its hands, 
and the statement made that, in the absence of default, the 
company shall be entitled to receive all such interest. If, in 
the draft of the mortgage, this section attempts to specify the 
rate of interest which shall be paid by the trustee, it is usually 
objected to by the trustee on the theory that the mortgage runs 
for a long period of years, and it is not good banking practice 
for a financial institution to contract to pay a specified rate of 
interest over a long term. In fact, the trust officer should take 
care to see that this provision does not conflict with the prac- 
tice of his banking department. From the trustee’s point of 
view, the mortgage provisions will be satisfactory if phrased in 
keeping with either clause quoted below: 

‘The Trustee will pay to the Company, from time to time, 
interest on any cash balances held by the trustee on deposit 
hereunder, at such rate, if any, as is customarily allowed by 
it on similar deposits. 


‘‘Any moneys received by the Trustee under any provisions 
of this indenture may be treated by it, until it is required to 
pay out the same conformably herewith, as a general deposit, 
without any liability for interest save as may be agreed upon 
between the Company and the Trustee.” 


Resignation or removal of trustee.—This article generally 
also contains the provisions relating to the resignation or 
removal of the trustee and the appointment of successor trus- 
tees. It is important merely that these provisions be perfectly 


TRUSTEE CLAUSES; MISCELLANEOUS 157 


clear and workable, so that if it becomes necessary or ad- 
visable for the trustee to resign the trust, there shall be 
no difficulty in accomplishing the resignation. The more 
modern mortgages also provide that any financial corpora- 
tion, resulting from a merger or consolidation to which 
the trustee shall be a party, shall, if qualified to accept such 
a trust, become successor trustee under the mortgage without 
further action on the part of the mortgagor, the trustee, or 
the successor trustee. | 


In the event that a trustee resigns or is removed and a 
successor is appointed the practice is to turn over to the new 
trustee all securities, cash, and executed counterparts of the 
mortgage and any supplemental indentures. It is not custom- 
ary for the resigned trustee to relinquish documents support- 
ing acts performed by it in the course of its administration 
of the trust or to turn over its records to the new trustee, 
although the new trustee should be furnished with an appro- 
priate certificate of the status of the trust. 


Individual trustee.— If there be an individual co-trustee, 
appropriate provisions will be included in this part of the 
mortgagee for the appointment of a successor individual 
trustee in case of the death, resignation, or incapacity of the 
individual originally appointed. Frequently an officer of the 
corporate trustee serves as co-trustee, and in such cases it 
is usual to permit the appointment of his successor by the 
president or board of directors of the corporate trustee. It 
is wise to provide that the individual trustee may appoint, 
as his attorney in fact, the bank or trust company named as 
corporate trustee. Sometimes the individual trustee, imme- 
diately upon the acceptance of the trust, executes a power of 
attorney pursuant to this provision. ‘This enables the cor- 
porate trustee, in the absence of the individual trustee, to con- 
clude matters of importance which otherwise might be delayed. 

If no individual trustee be appointed by the mortgage it 
is customary to provide that such an appointment may be 
made by joint action of the company and the corporate trus- 
tee in case any necessity arises for such an appointment at a 
later time. This particular provision is intended to cover 
the more or less modern practice of certain of the states in 
prohibiting or restricting, by statute, the performance of trust 


158 WORK OF CORPORATE TRUST DEPARTMENTS 


functions, within their territory, by corporations organized 
in other states. 


Miscellaneous provisions.—It is customary to insert in 
each mortgage an article of miscellaneous provisions which 
cover a variety of topics. We shall mention briefly a few of 
the more familiar provisions which come under this heading. 


Merger and consolidation.— Nearly every mortgage pro- 
vides for the contingency of the mortgagor merging or con- 
solidating with another company or leasing or selling its prop- 
erty as a whole. The mortgage of the Telephone Company 
covers this point in Article VII.* 

It is usual to provide that nothing contained in the mort- 
gage shall be construed as prohibiting the company from 
merging or consolidating with any other company which is 
legally authorized to carry on its business, nor from selling 
or leasing its property as a whole on such terms as will not 
weaken the security of the mortgage. The provision is further 
made that any such lease shall be subject to termination by 
the company or the trustee upon an event of default under 
the mortgage, and by any purchaser of the property of the 
mortgagor at any sale, under the power of sale conferred 
by the mortgage or under judicial proceedings. ‘he reasons 
for such limitations upon the terms of an authorized lease 
are evident. 

There is, in connection with the merger and consolidation 
provisions, a further logical requirement that any successor 
company through consolidation or merger shall execute and 
deliver to the trustee a proper instrument expressly assuming 
the obligations of the mortgagor. Ordinarily, the mortgage 
will go one step further and provide that, upon the proper 
filing of such an instrument, the successor shall be fully sub- 
stituted for the original mortgagor and shall have all of its 
rights, as well as its obligations under the mortgage including 
the right to issue bonds. 

In actual practice these provisions of a mortgage are 
seldom invoked. However, unless the article in question 
clearly specifies the evidence on which the trustee may rely 
as to the sufficiency of the instrument of assumption or of 


4 See page 365. 


TRUSTEE CLAUSES; MISCELLANEOUS 159 


the terms of lease or sale, the trustee will often find itself 
in a rather difficult position. For this reason it is good 
policy for the trustee in considering the mortgage prior to 
execution to make sure that the article, if included, makes ade- 
quate provision for the guidance and protection of the trustee. 
The usual method is to provide that if any question arises 
under the article, the trustee shall be fully protected in acting 
upon the opinion of any counsel selected by it. Some mort- 
gages state that the counsel selected by the trustee may be 
of counsel for the company. The basis for permitting the 
trustee to accept the opinion of the company’s counsel is 
that the legal examination involved in a merger, sale, or 
lease is necessarily long and expensive, and as counsel for 
the company has passed on the transaction in behalf of the 
company, the same counsel can render the required opinion 
much more expeditiously and cheaply than independent coun- 
sel. Assuming, that all of this is true, the situation is one 
where, under ordinary circumstances, the bondholders are 
entitled to the protection of an independent opinion, and if 
called upon to act in such a case the trustee will find itself in a 
more comfortable position if its mortgage specifically requires 
the opinion of independent counsel. 

Some mortgages contain special provision in respect of sub- 
sidiary companies. Section 3 of this article’ in the mortgage 
of the Telephone Company is an example. 


Evidence of ownership of bonds.—It is usual to provide in 
a separate article’ for the evidence upon which the company 
and the trustee may rely as to ownership of bonds. The 
ownership of registered bonds is indicated by the bond regis- 
try. In the case of coupon bonds the trustee is permitted, 
as a rule, to accept, as evidence of ownership, certificates 
executed by the trust companies, banks, bankers, etc., satis- 
factory to the trustee. ‘This article is purely formal and of 
little interest to the trust officer except in the event of bond- 
holders meeting or other concerted action by bondholders. 


Defeasance.—Unless, as in the ‘“Telephone”’ mortgage,’ 
the provisions as to defeasance appear in the preamble, they 


5 See page 367. 
6 See Article X of the “Telephone” mortgage, p. 383. 
7 See the “Telephone” mortgage, p. 339. 


160 WORK OF CORPORATE TRUST DEPARTMENTS 


are usually set forth in a separate article toward the end of 
the mortgage. 

When the bonds have been paid at maturity or provision 
made for their retirement through redemption or otherwise, 
the mortgagor probably will request of the trustee a duly 
executed certificate of satisfaction and discharge of the mort- 
gage which it can record in all jurisdictions in which the mort- 
gage is of record. The mortgagor will also expect the trustee 
to return all securities pledged or deposited with the trustee 
under the mortgage and any cash which may have been placed 
with the trustee, except that which the trustee will be required 
to pay out conformably with the mortgage provisions. The 
points to be checked by the trustee at the time are enumerated 
in the Mortgage Satisfaction Guide (Form 36). 


Form 36.—Mortgage Satisfaction Guide. 
Corporate Trust Department. Date Executed 


Mortgage Satisfaction Guide. 


Procedure to be observed in satisfying above Indenture and closing records. 
Enter the following symbols in the column at the left to indicate action taken 
with respect to each requirement: 


V = Fulfilled. F = Follow-up card prepared. O = Not applicable. . 


I. Arrange with Commission Division to collect unpaid fees and 
disbursements of Bankers Trust Company and of counsel, and 
to propose satisfaction fee. 

II. Ascertain that all bonds or notes and coupons are accounted for 
and/or that arrangements have been made for their retirement. 

III. Determine action to be taken with respect to any demands or 
notices served upon Bankers Trust Company claiming a lien 
upon collateral or other property subject to above Indenture at 
time of satisfaction. 

IV. Determine disposition to be made of the following: 

(a) Cash on hand. 
(b) Collateral held. 
(c) Insurance policies on file. 

VY. Obtain opinion of counsel approving satisfaction. 

VI. Enter Execution of instrument in “Documents Executed” record. 

¢ 

VII. Notify Co-Trustee and Co-Paying Agents (unless previously in- 
formed). 

VIII. Ascertain that usual report has been sent to Development Depart- 
ment. 


TRUSTEE CLAUSES; MISCELLANEOUS 161 


Form 36.—Mortgage Satisfaction Guide (continued) 


IX. Prepare memos for: 
(a) Corporate Trust Department (in duplicate). 
(b) Coupon Paying Division, 
(c) Bond Registration Division. 
(d) Statistical Department. 
(e) Document Files. 
(f) Trust Files. 


X. Remove and destroy any cards in the following files: 
(a) Maturity. 
(b) General. 
(c) Trust Requirements. 
(d) Vault Index (when all securities are released). 


XI. Stamp the word “Satisfied” and date of satisfaction on the fol- 
lowing records: 
(a) Index card in window file. Transfer card to closed-out file. 
(b) Index card in officer’s desk file. 
(c) History of Trust sheet. 
(d) Record of Bonds Issued. 
(e) Securities Held Ledger sheet. 


XII. Transfer to closed-out binder auxiliary records which have been 
completed. 


XIII. Arrange for cremation of the following: 
(a) Canceled bonds or notes. 
(b) Unissued bonds or notes. 
(c) Coupons. 


Procedure completed, 


(This record, when completed, should be filed in the Document Folder.) 


Satisfaction guide.—Item II on the Guide refers to ac- 
counting for all bonds and coupons. In addition to the 
deposit by the company of cash equal to the principal of all 
outstanding bonds, interest to date of maturity or redemption, 
and the premium on the bonds (if any), the trustee should 
require that funds be placed with it for all past-due coupons 
not surrendered. 


Old coupons.—In the case of some old mortgages it is ex- 
tremely difficult for the mortgagor to secure all of the matured 
coupons. However, unless the trustee receives satisfactory 
evidence that the company has made payment for coupons 
which may be missing, it is well within its rights in requiring 
an equivalent cash deposit. Depending on the period of years 
which may have elapsed since the due date of the coupons 


162 WORK OF CORPORATE TRUST DEPARTMENTS 


the trustee, acting under advice of counsel, may be willing 
to accept a bond of indemnity in place of the missing coupons. 


Cremation.— As soon as practicable after the satisfaction 
of the mortgage, the trustee, with the company’s permission, 
should arrange all bonds and coupons for cremation. ‘The 
cremation should include not only paid and canceled bonds 
and coupons, but unissued bonds (see Item XIII of Guide). 
It is highly important that both the company and the trustees 
have an accurate record of cremated securities. ‘To this end 
it is desirable that the trustee list all securities to be cremated 
on a certificate (Form 37). A full description of the se- 
curities should appear on the cremation certificate, including 
the bond or coupon numbers, the number of pieces, the ma- 
turity date, and the principal amount. 


Witnesses.—The mortgagor may wish to have a represen- 
tative present when the securities are cremated. Railroads 
are required by the Interstate Commerce Commission to des- 
ignate a representative for this purpose. ‘The trustee should 
always have at least two witnesses of its own at any cremation 
of securities. 


Periodical cremation of securities—— Corporations which 
have large bond issues outstanding find it convenient to deliver 
paid and canceled coupons and bonds to the trustee from time 
to time and arrange for periodical cremations. ‘This prevents 
an accumulation of canceled securities and facilitates the final 
“check-up” when the mortgage is satisfied. Corporate trus- 
tees handling a considerable volume of canceled securities 
frequently establish, under control of the corporate trust de- 
partment, a separate verification division for attending to audit 
and cremation work. . 


Definitions.—It is quite usual to find several sections of a 
mortgage (particularly in the larger and more involved mort- 
gages) devoted to a series of definitions explaining the mean- 
ing of certain terms used in the mortgage, for example, “net 
earnings,” “underlying mortgages,” ‘“‘permanent additions,” 
‘“engineer’s certificate,” and so on. These definitions may be 
very useful in settling points on which the parties to the 
mortgage may be at variance. 


TRUSTEE CLAUSES; MISCELLANEOUS 163 


Form 37. 
Cremation Affidavit Certificate. 


STATE OF New York 
County of New York f* 


*) S766 ‘aye! pe) & (0: 'e (e 6) ee) Wia (ee ee 66 6 0 6 © 6 6 0 fe 60) 0.6 © 6 0 6 Bs 6 0 6 6 6 60 6 6 50 6 66 6 8 6 6 6 ore 6 


Ea hd aoe oh ie Ps ries BR ea ae a , being duly and severally sworn, do 
each severally depose, certify and say: 

VEU Be Qcotaty Sees LG Nk aA a MARAE tah ree GRE UAL MUR ASB p Sue NM ra, WU Meee 
LING eek fechas Foe it eS have wthis vases ays ayn ObRirea ertaia haere alee es 


19 , at No. 16 Wall Street, in the City and State of New York, in the pres- 
ence of one another, destroyed by burning to ashes the property below described 
in detail. 


Sworn to before me this 
PRAYER reso ints God Sates 19 
Representing soya ee iyi ae ae anette ee 
Representing BANKERS TRUST COMPANY 
Accepted Corporate Trust Dept. 
Pen ERE GE RUSH COMPANY ily Mitek Cig ity wis, hime aia\ dio iw wioln a che tote etre) allel eh tre lan Sinteg Cabade 


Representing BANKERS TRUST COMPANY 
MRS Sie tedela'sl is ite las hata ale sia Coupon Verification Dept. 
Asst. Secretary 


Supervision by bankers.—Occasionally we find a mortgage 
in which the bankers who have floated the issue retain a 
certain amount of supervision of the mortgagor company. 
For example, the company may covenant to furnish the bank- 
ers with financial statements, or it may agree to make appoint- 
ments of accountants or appraisers subject to the bankers’ 


164 WORK OF CORPORATE TRUST DEPARTMENTS 


approval. The extent of these supervisory relations of the 
bankers should be clearly expressed. 


Immunity of stockholders, etc.—Some reference is also 
made in a mortgage to the immunity of stockholders, officers, 
and directors of the company. This emphasizes the corpo- 
rate nature of the obligation and is designed to relieve the 
owners of the company and the management from personal 
liability. 

Testimonium; signatures; acknowledgments.— The mort- 
gage closes with the signatures and seals of the parties to the 
instrument, the signatures of witnesses to the execution, and 
the acknowledgments in form required by the jurisdictions 
in which the mortgage is to be recorded. ‘The regularity and 
suficiency of the mortgage in these respects are matters as 
to which the trustee will be guided by the advice of its counsel. 
The trustee, however, should see that the officer signing the 
mortgage on its behalf and the officer attesting the corporate 
seal affixed to the instrument are duly authorized by its board 
of directors to perform these acts. 


CHAPTER XII 


EQUIPMENT TRUSTS; COLLATERAL TRUSTS; 
UNSECURED ISSUES 


Equipment trusts.—This is a special form of trust which 
has grown out of the necessity for the purchase of railroad 
equipment on credit. Equipment trust agreements differ in 
form from corporate mortgages, although they contain many 
of the same provisions. We shall examine, briefly, into some 
of the special provisions relating to the transactions involved. 

There are in use two general forms or plans of equipment 
trust: 


1. Philadelphia plan.'—The essence of this plan is that 
the equipment is leased to the railroad and the railroad 
pays for it through “rental”? payments to the trustee, such 
rentals being applied to the corresponding maturities of prin- 
cipal and “dividends” of certificates issued under the plan and 
held by investors. 

2. Conditional sale plan—Here the equipment is condi- 
tionally sold to the railroad, the trustee retaining ownership 
(conditional vendor’s title), until all the installments of prin- 
cipal and interest have been paid. 

There are various methods of accomplishing either plan, 
the details of which need not be gone into for present purposes. 


Reasons for Philadelphia plan The reason for the adop- 
tion of the Philadelphia plan (which rightfully should be 
called the ‘‘Pennsylvania plan’’) was the state of the law in 
Pennsylvania in regard to conditional sales. ‘The Pennsyl- 
vania courts had uniformly refused to sustain the title of a 
conditional vendor who had surrendered possession to his 
vendee, as against the claims of creditors of, and purchasers 
from, the vendee without notice of the conditional vendor’s 
claims. Pennsylvania, in the days when the above decisions 
were made, likewise had no general system for recording or 
filing chattel mortgages. Bankers and their counsel, there- 


1A Philadelphia Plan equipment trust is set forth on page 395 et seq. 
165 


166... WORK OF CORPORATE TRUST DEPARTMENTS 


fore, arranged to have the equipment not sold but leased with 
the privilege to the lessee of purchasing at the expiration 
of his lease. The lessor’s title not having passed, the pre- 
sumption in favor of creditors of the railroad that the railroad 
owned the equipment was not available to them. 


In nearly all of the states of the United States substantially 
identical statutes have been passed during the last forty years 
whereby the conditional sale arrangement is expressly vali- 
dated in respect of railroad equipment. Many of these stat- 
utes also permit the lease plan or ‘‘Philadelphia plan” and 
the chattel mortgage arrangement. In some states, however, 
the Philadelphia plan still affords the best protection to the 
interests which furnish the equipment, and in those states 
the Philadelphia plan is still the most practicable for use. 
In other instances also the Philadelphia plan is doubtless 
employed, because investors and distributing houses are fa- 
miliar with it. 


Cash deposit with trustee.—In most cases the trust, under 
either plan, is executed before the equipment is manufactured. 
The railroad agrees to pay a percentage of the cost, usually 
20 per cent, in cash, and the balance with the proceeds of the 
equipment notes. The cash payment by the railroad and 
the proceeds of the notes will be deposited with the trustee, 
and used pursuant to the terms of the trust agreement in 
paying for the equipment as it is delivered by the manufac- 
turers. he agreement will usually provide for the appoint- 
ment of inspectors to inspect the equipment on delivery and, 
if satisfactory, to accept it on behalf of the railroad, and so 
certify to the trustee. Further provision will be made in 
the agreement for the payment by the trustee of the cost of 
the equipment upon receipt of: (1) a proper invoice from 
the manufacturer specifying the equipment and its cost (which 
must correspond to the prices stipulated in the equipment 
trust agreement or the purchase contracts); (2) a bill of 
sale in favor of the trustee; (3) the inspector’s certificates; 
and (4) opinion of counsel satisfactory to the trustee that the 
bills of sale are valid and effective to vest title to the equip- 
ment in the trustee, free of all liens and encumbrances. 


Covenants of railroad——Under the familiar equipment 
trust the railroad company, among other things, undertakes: 


EQUIPMENT; COLLATERAL; UNSECURED ISSUES 167 


(1) to pay at their respective maturities, the equipment obli- 
gations, and the interest thereon; (2) to fasten and to keep on 
each piece of equipment a metal plate showing that the trustee 
is the owner or lessor of such equipment, although the railroad 
also may letter the equipment with its name or other marking 
to indicate its interest therein; (3) to maintain the equipment 
in proper condition and repair, and replace at its expense 
any equipment destroyed; (4) properly to insure all equip- 
ment in favor of the trustee; (5) to file periodically with the 
trustee a statement of the location and condition of all equip- 
ment. 


Comparison between Philadelphia plan and conditional 
sale arrangement.—Equipment trust certificates issued under 
a “Philadelphia plan” are usually signed by two officers of 
the trustee and its corporate seal is afixed. A statement is 
contained in the certificates that the amounts due thereon 
are payable only out of “rentals” to be received from the 
railroad. ‘The coupons attached to the certificates are re- 
ferred to as “dividend warrants.”’ Payment of principal and 
“dividends” is guaranteed by the railroad company in the 
agreement and, sometimes, by endorsement on each certificate.” 

Issues under contracts of conditional sale usually are desig- 
nated as “‘equipment notes” or “equipment bonds.” These 
are signed by the railroad and certified by the trustee in the 
usual manner. 

Most equipment issues mature in equal periodical install- 
ments over a period of from ten to fifteen years. For ex- 
ample, an issue of $1,500,000 might be payable over.a fifteen- 
year period at the rate of $100,000 per year. Certificates 
Nos. 1 to 50 at $1,000 would probably mature six months 
from the date of issue; Nos. 51 to 100 in one year, and so on. 

As in the case of a mortgage the trustee is required, upon 
complete payment by the railroad of all of its obligations 
under the trust, to execute an appropriate instrument canceling 
the trust and assigning the equipment to the railroad. 


2In a decision of the Supreme Court of the United States (Lederer v. 
Fidelity Trust Company, 267 U. S. 12), it was held that equipment trust cer- 
tificates issued under the Pennsylvania plan are subject to the United States 
Documentary Tax as “certificates of indebtedness.” ‘This decision was the re- 
sult of a suit to recover the cost of revenue stamps affixed to railroad equip- 
ment certificates. 


168 WORK OF CORPORATE TRUST DEPARTMENTS 


The conditional sale agreement has in recent years been 
applied to the purchase of many things other than railroad - 
equipment, for instance, vessels of various kinds, equipment 
for industrial plants, and so forth; but the general principles 
involved are the same in each case. 


Collateral trust indentures.— In Chapter IX we discussed 
typical provisions in respect to stocks or bonds pledged with 
a trustee as part of the mortgage security. In most cases 
these provisions also apply with equal force to securities 
pledged and deposited with a trustee under a collateral trust 
indenture. 


The following statements regarding collateral indentures 
are quoted from an address of Mr. Francis Lynde Stetson’s 
before the Association of the Bar of the City of New York.’ 
“Ordinarily, the stock pledged under such agreements is the 
stock of some company or companies subsidiary to the pledgor, 
and the bonds pledged are either those of such subsidiary 
company, or long-term mortgage bonds of the obligor pledged 
as security for its own short-term notes. Security of the 
latter class is resorted to when short-time money is obtainable 
on better terms than long-time money. Accordingly, the cor- 
poration issues a series of notes payable within a few years 
and secured by the pledge of its own long-term mortgage 
bonds, the expectation being that such bonds may be sold on 
favorable terms at the maturity of the notes, which then may 
be paid from the proceeds. Unless secured by mortgage such 
pledged bonds, being merely the obligations of the pledgor, 
would not constitute collateral security for the pledgor’s own 
notes.” 


Frequently, however, collateral trust issues are not secured 
either by the pledgor’s bonds or its subsidiary’s stocks, but 
by securities of companies which the pledgor does not control, 
but in which it may have a substantial interest. In such case, 
the trustee will, perhaps, be authorized by the indenture to 
collect the income from the pledged securities and apply it 
to the payment of interest on the collateral bonds. An adjust- 
ment is then made with the pledgor at each interest date, 
the trustee paying over to the pledgor the excess, if any, of 


3 “Some Legal Phases of Corporate Financing, Reorganization and Regula- 
ton Deo 7s 


EQUIPMENT; COLLATERAL; UNSECURED ISSUES 169 


income collected over current interest to be paid on the col- 
lateral bonds, or, if there is a shortage, receiving from the 
pledgor funds sufficient to meet such interest. 

In collateral trust indentures of this type where the col- 
lateral is diversified, there is no point to inserting provisions 
such as were discussed in Chapter [X in respect to protecting 
the trust estate from possible loss of stock control of a 
company. On the other hand, the indenture probably will 
permit substitution of collateral, within a certain range of 
securities, merely on the certificate of certain officers of the 
pledgor, provided the new collateral is of market value equal 
to the collateral withdrawn. 

Unsecured issues.— Generally speaking, trust agreements 
providing for the issue of unsecured obligations, such as notes 
or debentures, are simpler than either mortgages or collateral 
trust indentures. The one article which is apt to be at all 
lengthy is that dealing with the covenants of the debtor. 
Outside of the financial strength of the debtor these cove- 
nants represent the only safeguard of the noteholders, and the 
bankers who underwrite the issue usually will insist upon 
inserting such covenants as, in their opinion, will sufficiently 
strengthen the issue to make it attractive. Quite frequently 
the issuing corporation covenants that, if a subsequent mort- 
gage is placed on its property, the debentures will be secured 
by the mortgage equally with the subsequent issue. Deben- 
tures and other unsecured issues often are given the privilege 
of conversion into stock of the issuing company at a given 
figure. The process of conversion will be discussed in the 
next chapter. 


CHAPTER XIII 
MISCELLANEOUS TRUST FUNCTIONS 


Miscellaneous functions.— Corporate trust departments 
of banks and trust companies perform many functions which 
do not come under mortgages naming the institutions as trus- 
tees, although a substantial part of this miscellaneous business 
is a direct outgrowth of mortgage appointments. 


Interim certificates.— Interim certificates (also called in- 
terim receipts) are issued in lieu of temporary bonds, in 
cases where it is desired to place an issue on the market before 
it is possible to execute the mortgage or issue bonds there- 
under. Ordinarily, the company which is to issue the bonds, 
and the underwriters who are to sell the issue, or, if an un- 
derwriting syndicate has been formed, the syndicate mana- 
gers, will join in a letter of instructions to a bank or trust com- 
pany as depositary (usually the institution which is to act as 
trustee under the mortgage) directing the depositary to issue 
its interim certificates representing a specified principal amount 
of bonds of the proposed issue, to, or upon, the written order 
of the underwriters; but only against the deposit with it of a 
specified amount in cash per $1,000 principal amount of bonds. 
The letter of instructions will further direct the depositary to 
hold the cash for the benefit of the holders of its interim 
certificates until the mortgage shall have been properly ex- 
ecuted and it shall have received bonds of the proposed issue 
in form available for distribution in exchange for the out- 
standing “‘interims.”’ The letter will further direct the dis- 
position of the cash deposit to be made by the depositary on 
receipt of such bonds. Usually, that portion of the deposit 
representing the price at which the bonds were sold to the 
underwriters, with any interest allowance, will be paid to 
the company, and the balance, representing the underwriters 
profit, will be paid to the underwriters. 

It is good practice for the letter of instructions to specify 
a date, on or before which the bonds, in form available for 


170 


MISCELLANEOUS TRUST FUNCTIONS 171 


distribution, must be delivered to the depositary, and to pro- 
vide that if the bonds are not so delivered the depositary 
shall use the cash in its hands to make payment of the amount 
specified in the interim certificates to the holders thereof, upon 
surrender to it of such certificates. It is important for the de- 
positary to see that the amount of cash deposited with it will 
be sufhcient to make the required distribution to the holders of 
its interim certificates, or that provision is made to its satis- 
faction, for the deposit of any additional cash required. As 
the obligation under the interim certificate is directly that of 
the depositary, an institution issuing its certificates on any 
terms other than the deposit of the full amount of cash which 
it might be required to pay out under any circumstances is, in 
effect, granting credit and should be guided accordingly. 

At times the letter of instructions will provide that the de- 
positary shall pay over the cash to the company and the under- 
writers upon execution of the mortgage and receipt by the 
depositary of a single temporary bond, to be held pending 
receipt of definitive bonds in form available for distribution. 
This may prove to be an unsatisfactory arrangement, as de- 
lay in delivery of the definitive bonds beyond the date speci- 
fied in the outstanding receipts would place the depositary in 
an embarrassing position. 

The position of an institution under an issue of interim re- 
ceipts is dangerous, unless all contingencies are fully covered, 
and the form of its receipts and the letter of instructions meet 
the legal and practical requirements. 


A typical letter of instructions and interim receipt are shown 
below: 


National Trust Company, New York, March 22, 1926. 
200 Wall Street, 
New York City. 


Dear Sirs: 


1. Pursuant to an agreement dated March 8, 1926, between Johnson 
Brothers and Read & Co. (hereinafter referred to collectively as the bankers) 
and Amalgamated Company (hereinafter referred to as the corporation) said 
corporation agreed to cause all of its assets to be sold to Amalgamated Corpora- 
tion, a corporation to be organized under the laws of the State of New York 
(hereinafter referred to as the new corporation) and agreed to cause said new 
corporation to create, issue, and sell to the bankers $6,000,000 principal amount 
of its First and Refunding Mortgage Twenty-Year 6 per cent Gold Bonds, 
Series “A”, to be dated as of March 1, 1926, to mature March 1, 1946, and to 
bear interest at the rate of 6 per cent per annum from March 1, 1926, all of 


172 WORK OF CORPORATE TRUST DEPARTMENTS 


which will be issued under an indenture to be dated March 1, 1926, between 
said new corporation as mortgagor and your company as trustee. 

2. It was agreed between the parties to said agreement that pending the 
consummation of various legal proceedings thereby contemplated, the bankers 
may cause you to issue interim receipts exchangeable for bonds, when, as, and 
if, issued and received by them and delivered by them to you. Acting pursuant 
to said provisions, the bankers hereby request you to issue interim receipts 
(in the form hereto attached) calling for the above-mentioned bonds, to, or 
upon, the order of the bankers, or any of them, from time to time for a principal 
amount not exceeding in the aggregate $6,000,000 upon the deposit with you of 
cash at the rate of $1,000 for each $1,000 principal amount of interim receipts, 
plus accrued interest at the rate of 6 per cent per annum upon said principal 
amount from March 1, 1926, to the date of such deposit. Receipts are to be in 
the denominations of $1,000 and $500 principal amount. 

3. The cash so deposited with you is to be held for the benefit of the 
holders of interim receipts until the above-mentioned bonds in definitive form 
(or a temporary bond or bonds exchangeable for definitive bonds when pre- 
pared), together with a copy of opinion of counsel for the bankers to them 
approving the creation, issue, and sale to the bankers of the bonds, are de- 
livered to you up to a principal amount equal to the amount called for by the 
outstanding interim receipts, after which the cash so deposited with you, to- 
gether with the interest you allow thereon, is to be paid over by you as follows: 


(a) You shall pay to and upon the order of the bankers out of the cash so 
deposited with you 5 per cent of the principal amount of said interim receipts, 
being the sum of $300,000. 

(b) You shall pay to or upon the order of the new corporation an amount 
equal to 95 per cent of the principal amount of ‘said bonds, plus all money 
deposited with you representing accrued interest as aforesaid, together with the 
amount of the interest allowed by you. 


4. In case any holder of an interim receipt proves to your satisfaction that 
such interim receipt has been lost, stolen, mutilated, or destroyed, then, upon 
receipt of indemnity satisfactory to you and to the new corporation, and, if 
mutilated, the surrender of the mutilated receipt, you are authorized to issue 
to such holder a new interim receipt in lieu of the interim receipt so lost, 
mutilated, or destroyed. 


5. In the event that the above-mentioned bonds and opinion of counsel are 
not delivered to you on or before May 17, 1926 (or on or before such later 
date, if any, as the bankers may fix and indicate to you in a writing signed 
by them and delivered to you prior to May 17, 1926), in a principal amount 
equal to the principal amount of interim receipts issued by you, you are 
authorized at any time within two days thereafter to give notice by publication 
once a day for two successive days in a daily newspaper published in the 
Borough of Manhattan, City of New York, that you will, upon surrender of 
such interim receipts, refund to the bearers thereof an amount in cash equal to 
$1,000 for each $1,000 principal amount of interim receipts then outstanding, 
together with interest at the rate of 6 per cent per annum upon the principal 
amount of such outstanding interim receipts from March 1, 1926, to the last 
day of such publication. In the event of such non-delivery on or before May 
17, 1926 (or such later date, if any, as may be fixed by bankers as above 
provided), the corporation agrees to pay to you, or cause to be paid to you 
within two days thereafter, for the benefit of the holders of such outstanding 
interim receipts, a sum equal to the difference between interest at the rate of 
6 per cent per annum on the principal amount of bonds represented by such 


MISCELLANEOUS TRUST FUNCTIONS 173 


outstanding interim receipts and the interest allowed by you upon the moneys 
deposited with you hereunder (which shall be at the rate or not less than 
214 per cent per annum) from the respective dates of issue of such interim 
receipts to the last day of such publication. The bankers hereby jointly and 
severally guarantee payment by the corporation of said sum as and when the 
same shall become due as aforesaid. You are hereby authorized to redeem 
such interim receipts upon the terms aforesaid out of the moneys deposited 
with you and received by you from the corporation (or the bankers) as herein- 
above set forth, including the interest allowed by you on moneys deposited 
hereunder. 


6. All your expenses in connection with the trusteeship, including the 
preparation and issuance of the interim receipts and the bonds, are to be paid 
by the corporation or the new corporation. You shall not be responsible in 
any manner whatsoever for the recitals of fact and the covenants and agree- 
ments of the corporation or the bankers herein or in the agreement above- 
mentioned contained, all of which are made by the corporation and/or the 
bankers solely. You may employ agents or attorneys in fact and shall not be 
answerable for the default or misconduct of any agent or attorney appointed 
by you in pursuance hereof if such agent or attorney shall have been selected 
with reasonable care. You may advise with counsel to be selected and em- 
ployed by you at the reasonable expense of the corporation, and you shall be 
fully protected in respect to any action hereunder taken or suffered in good 
faith by you in accordance with the opinion of such counsel. You shall not 
be under any obligation to take any action toward the execution or enforce- 
ment of the trust hereby created or to institute, appear in, or defend any suit 
in respect hereof, unless, as often as required by you, you shall be indemnified 
to your satisfaction against any expenses or liability connected therewith. 
The corporation and the bankers hereby jointly and severally agree to re- 
imburse you for any liability or damage you may sustain or incur in the 
premises. 

Yours very truly, 


AMALGAMATED COMPANY, 
By , 
Vice President 
JOHNSON BROTHERS, 


By 
READ & Co., 
By 
AMALGAMATED CORPORATION, 
By 


Vice President 
Fig. 6.—Interim Receipt. 


No. M INTERIM RECEIPT $1,000 
for 
AMALGAMATED CORPORATION 
First and Refunding Mortgage Twenty-Year 6% Gold Bonds 
Series A 
Interest to be Payable March 1 and September 1 
To be dated March 1, 1926. To become Due March 1, 1946. 
THIS IS TO CERTIFY that the bearer, upon surrender of this Receipt at 


174 WORK OF CORPORATE TRUST DEPARTMENTS 


the office of the undersigned, 200 Wall Street, in the Borough of Manhattan, 
City of New York, will be entitled to receive 


ONE THOUSAND DOLLARS ($1,000) 


principal amount of the First and Refunding Mortgage Twenty-Year 6%: 
Gold Bonds, Series A, of AMALGAMATED CORPORATION carrying inter- 
est from March 1, 1926, proposed to be issued under an indenture of mortgage 
to bear date March 1, 1926, and to be made by said Amalgamated Corporation 
to National Trust Company and Henry F. Wall as Trustees when, as, and if 
said bonds shall have been prepared, executed, authenticated in definitive form 
and delivered to the undersigned for delivery pursuant hereto. This Receipt is 
issued under and pursuant to a letter of instructions to the undersigned, dated 
March 22, 1926, from Johnson Brothers and Read & Co. hereinafter collectively 
called the Bankers and Amalgamated Company and said Amalgamated Cor- 
poration. 

One or more temporary printed bonds, exchangeable for such definitive 
bonds, will, if, as and when issued and received by the undersigned for that 
purpose (accompanied by a copy of an opinion of Counsel for the Bankers ap- 
proving the creation, issue and sale to the Bankers of said Series A bonds) be 
held by it for the pro rata benefit of the bearers of the interim receipts of which 
this is one, pending preparation and delivery of the definitive bonds. If for any 
reason such temporary bond or such temporary bonds shall not have been de- 
livered to the undersigned as aforesaid for the purposes aforesaid (accompanied 
by a copy of the opinion of Counsel for the Bankers as aforesaid) by May 17, 
1926, or by such later date, if any, as the Bankers may fix and designate to the 
undersigned in a writing signed by each of them and delivered to the under- 
signed prior to May 17, 1926, the undersigned will forthwith give notice to that 
effect by publication once a day for two successive days in a daily newspaper 
published in the Borough of Manhattan, City of New York, and, upon such 
notice being so given, the undersigned will at any time thereafter, upon surrender 
of this Receipt, pay the sum of One Thousand Dollars ($1,000) to the bearer 
hereof, together with an amount equal to interest at the rate of six per cent 
(6%.) per annum upon the principal amount of $1,000 from March 1, 1926, to 
the last day of such publication. 

Said indenture will provide for an issue of $6,000,000 principal amount of 
Series A bonds to be presently outstanding and as provided in said indenture 
additional bonds of Series A or any other series may be issued from time to 
time on or after the execution and delivery of said indenture provided the total 
principal amount of bonds at any one time outstanding shall not exceed the 
principal amount of $25,000,000. 

Every taker and holder of this Receipt, by accepting the same, agrees with 
the undersigned and with every subsequent taker and holder hereof, that this 
Receipt may be negotiated by delivery by any person having possession of the 
same, howsoever such possession may have been acquired, and that any holder 
who shall have taken this Receipt from any person for value and without 
notice of prior defenses or equities enforceable against such person, shall thereby 
acquire absolute title hereto, free of any defenses enforceable against or 
equities or claims of ownership of any prior holder. Every taker and holder 
of this Receipt hereby further agrees that the undersigned may treat the bearer 
of this Receipt as the absolute owner hereof, for all purposes, and that the 
undersigned shall not be affected by any notice to the contrary. 

NATIONAL ‘TRUST COMPANY, 


Dated, New York, N. Y., April 6, 1926. — By 


Assistant Secretary 


MISCELLANEOUS TRUST FUNCTIONS 175 


Sometimes it is desired to have attached to the interim re- 
ceipt a coupon for interest due on the first interest date after 
the issuance of the receipt. There is no objection to this, 
provided appropriate references are included in the body of 
the interim receipt, and in the letter of instructions or agree- 
ment, and, further, that at the time of the issuance of the 
receipts cash is placed with the depositary to cover in full the 
interest represented by the coupon, or satisfactory assurance 
as to such payment is given. 


Bankers’ shares.— Under the “bankers’ share’ arrange- 
ment a bank or trust company, as depositary, issues its certi- 
ficates representing an interest in deposited securities—usually 
stock. The stock may be selling on the market at a price 
which is so high that it is difficult to interest the average in- 
vestor, and the company, for reasons of its own, does not 
care to issue a stock dividend to bring down the market price 
of its shares. In such a case the company, or, perhaps, bank- 
ers, interested in the market for the stock, will place with the 
depositary, under an appropriate trust agreement, a block of 
the stock, and pursuant to the terms of the trust agreement 
direct that institution to issue its ‘“‘bankers’ shares.” ‘The 
trust agreement may contemplate the deposit of a given num- 
ber of shares in each of several companies; for example, in 
“units”? composed of 1 share each of 10 different stocks. The 
following is the form of a typical ‘‘bankers’ share’’ certificate 
covering one class of stock. 


Fig. 7.—Bankers’ Shares Certificate. 
NYO No. THE CONSOLIDATED COMPANY BANKERS’ SHARES SHARES———— 
(This Certificate is transferable either in New York, Boston, or Philadelphia.) 


Tuis Is To CERTIFY THAT is the owner of of The Consolidated 
Company Bankers’ Shares, so called, each such Bankers’ Share representing a 
one-tenth (1/10) interest in a share of One Hundred Dollars ($100) par value 
of the common stock of The Consolidated Company hereinafter called the 
“Company,” a corporation of the State of Delaware, and is subject to the 
provisions of the agreement hereinafter referred to, entitled upon surrender 
at the office of First Trust Company, Transfer Agent of the undersigned 
in the Borough of Manhattan, City of New York, of this Certificate, or this 
and other similar Certificates duly assigned for transfer, representing ten 
(10) or more Bankers’ Shares to a certificate for one (1) share of common 
stock of the Company of the par value of One Hundred Dollars ($100) for 
each ten (10) Bankers’ Shares represented by the Certificate or Certificates 
so surrendered, and to receive a new Certificate for any balance of Bankers’ 
Shares over the highest multiple of ten (10) contained in the number of 


176 WORK OF CORPORATE TRUST DEPARTMENTS 


Bankers’ Shares so surrendered and until such surrender is entitled to receive, 
from time to time, the proportionate part, applicable to the Bankers’ Shares 
represented by this Certificate, of any cash dividends in respect of the common 
stock of the Company deposited under said agreement, and of the net cash 
proceeds of any stock or other security dividends or distribution other than cash 
dividends, in respect of said stock, at the time, in the manner and upon the 
terms and conditions in said agreement provided. Said cash dividends in 
respect of said common stock, and such cash proceeds of any stock dividends 
when received by the undersigned hereinafter called the “Depositary,” shall 
be paid by or on the order of the Depositary to First Trust Company for 
distribution by them to holders of Bankers’ Shares, as above set forth, for 
which said distribution the Depositary shall not be responsible in any respect 
whatsoever. This Certificate is issued pursuant to, and is subject to, the 
terms and conditions of an agreement, dated the first day of March, 1924, 
by and between John Small & Company, National Trust Company as Deposi- 
tary, and all present and future holders of Certificates issued and to be 
issued thereunder, to which agreement reference is hereby made, with the 
same force and effect as if herein fully set forth, for a full description of the 
rights of the holder hereof and of the rights, duties, and obligations of John 
Small & Company and of the Depositary hereunder and under said agree- 
ment, to all the provisions whereof the holder of, by accepting the Certificate, 
assents. The holder of this Certificate is entitled to no voting rights what- 
soever.2 This Certificate is transferable only on the books of the Depositary, 
at the office of any of its transfer agents by the registered holder hereof as 
the owner hereof for all purposes whatsoever, except that delivery of stock 
certificates of the Company shall not be made without surrender hereof. ‘This 
Certificate shall not be valid until and unless countersigned by one of the 
Transfer Agents and registered by one of the Registrars of the Depositary. 

In WITNEss WHEREOF, National Trust Company, as Depositary, has caused 


this Certificate to be executed in its corporate name by one of its Assistant 
Secretaries, this , 19—. 


NATIONAL TrusT CoMPANY, Depositary 
Registered: Assistant Secretary. 


SECOND TRUST COMPANY, Registrar 
By 
Assistant Secretary 
Countersigned: 
First Trust CoMPANY, Transfer Agent. 
ve Assistant Cashier 
It is important that such an agreement and the correspond- 
ing “‘bankers’ shares,” make specific provision for (a) the 
parties who shall have the right to deposit stock and require 
the issue of “‘bankers’ shares’; (b) the total authorized issue, 
if any limit is desired other than that imposed by the amount 
of the company’s stock outstanding; (c) the method of re- 
ceipt by the depositary of dividends declared and paid on the 


3 As an alternative there may be inserted a statement_of the conditions on which 
che registered holder of a bankers’ share may direct the Depositary to vote the stock 
covered by the bankers’ shares. 


MISCELLANEOUS TRUST FUNCTIONS LG 


stock of the company and the corresponding distribution of 
such funds to the holders of the “‘bankers’ shares’; (d) the 
treatment of any dividends paid otherwise than in cash; (e) 
the control of the voting rights on the deposited stock; and 
(f) the conditions under which “‘bankers’ shares’? may be sur- 
rendered and the deposited stock withdrawn. It is good prac- 
tice for the ‘bankers’ shares’’ to be registered by another 
institution, and, to accomplish this, the trust agreement must 
contain appropriate provisions. If it is desired to make a 
market for the ‘‘bankers’ shares’ in two or more cities, the 
trust agreement will often provide for a transfer agent and 
registrar in each city under the general control of the de- 
positary. 


Investment trusts.—The investment trust, comparatively 
new to the American public, has been used in Great Britain 
for many years. It differs from the bankers’ share arrange- 
ment chiefly in its provisions permitting investment in a wider 
range of securities. Instead of being confined to one or 
a few stocks comprising a “unit,” the investment trust con- 
templates investment and reinvestments in, perhaps, hundreds 
of enterprises. In this way, it is claimed, the investor’s risk 
is lessened by reason of the greater diversity of the investment. 

In some cases the securities of an investment company take 
the form of collateral trust bonds and the deed of trust au- 
thorizes the trustee to allow substitutions of securities (within 
_ prescribed limits) provided the market value of the collateral 
is maintained at a certain percentage above the principal 
amount of the outstanding collateral trust bonds. ‘There ts 
no marked difference, in form, between an “investment trust”’ 
issue of this nature and collateral trust bonds which were dis- 
cussed in Chapter XII, except the provisions as to investment 
control, which are often complicated and take a wide variety 
of form. 


American shares.—Here again a financial institution is re- 
quested to issue its certificates, but for different reasons. ‘This 
type of business has followed the War and is due to the grow- 
ing tendency to sell foreign securities in this market. It is 
difficult to list foreign securities on the American exchanges, 
and, in any event, the investor here has not yet been educated 


178 WORK OF CORPORATE TRUST DEPARTMENTS 


to the point where he readily purchases securities in unfamiliar 
form and expressed in foreign currencies. Consequently, bank- 
ers interested in making a market in this country for a foreign 
security frequently execute an appropriate trust agreement to 
an institution as trustee or depositary providing for the de- 
posit of the stock of the foreign company and the issue of 
corresponding ‘American shares.’ ‘The points which the 
trust officer will desire fully covered in such an agreement fol- 
low closely those mentioned under ‘bankers’ shares,’ but, 
because the rate of exchange enters into the dividend prob- 
lem, and the distance of the home office adds to the voting 
problem, the provisions relating to these two points are fur- 
ther complicated and should be worked out very carefully. 
The following is the form of a typical “American share’’ 
certificate: 


Fig. 8.—“American Shares” Certificate. 
No. 00000 100 ‘American Shares” 
THE CONTINENTAL COMPANY, LTD. 


Incorporated in the United Kingdom of Great Britain and Ireland 


Tuis Is To CERTIFY that is the owner of OnE HUNDRED —— 
“American shares,” so-called, each of such “American shares” representing 
an interest in two and one-half Ordinary shares, of the par value of five 
(5) shillings each, of THE CONTINENTAL COMPANY, LTD., a corporation of 
the United Kingdom of Great Britain and Ireland (hereinafter called the 
Company), deposited under the Agreement hereinafter mentioned, and is 
entitled on or after January 1, 1928, without the consent of the Depositors 
hereinafter mentioned, or before January 1, 1928, with the consent of said 
Depositors, upon surrender at the office of the undersigned in the Borough of 
Manhattan, City of New York, of this certificate duly endorsed for transfer, 
and upon payment of the charges, if any, provided for in said Agreement, 
to receive a certificate of the Company for five such Ordinary Shares, of the 
par value of five (5) shillings each, for each two “American shares” repre- 
sented by this certificate, or, at the option of the Depositary, to receive an 
order calling for delivery at the office or agency of the Depositary in London, 
England, of a certificate of the Company for five of such Ordinary shares of 
the par value of five (5) shillings each, for each two “American shares” 
represented by this certificate; and until such surrender is entitled to receive 
from time to time, and as provided in the Agreement hereinafter mentioned, 
the proportionate part applicable to the “American shares” represented by this 
certificate of any dividends and rights received by the undersigned in respect 
of the Ordinary shares of the Company deposited under said Agreement. 

This Certificate is issued pursuant to, and is subject to, all the terms and 
conditions of an Agreement dated the 31st day of December, 1923, by and 
between James Beaver & Co., a copartnership, of the City of New York, 
N. Y., therein and herein sometimes called “the Depositors,” the undersigned 
and all registered holders of certificates from time to time outstanding 
thereunder. 


MISCELLANEOUS TRUST FUNCTIONS 179 


This certificate is transferable on the books of the undersigned by the 
registered holder hereof, in person or by attorney duly authorized, on surren- 
der hereof duly endorsed and according to rules established for the purpose 
by the undersigned and in consonance with the rules of the New York Stock 
Exchange. 

This certificate is not valid unless registered by THE TENTH NATIONAL 
Bank of the City of New York, as Registrar. 

In WITNESS WHEREOF, THE NATIONAL TrusT CoMPANY, as Depositary, has 
caused this certificate to be executed in its corporate name by its Secretary, 
or’ one of its Assistant Secretaries, this day of , 19—. 


NATIONAL TRUST COMPANY, 
Depositary. 
By 
Assistant Secretary. 


day of , 19—. 


THE TENTH NATIONAL BANK OF THE CITY OF NEW YORK, 
Registrar. 


Registered this 


By 
Assistant Cashier. 

French bearer certificates.— Beginning about 1908 the 
interest of the French investor in American securities ap- 
peared, in the judgment of some bankers, to justify an effort 
to supply the French investor with American securities in the 
form to which he was accustomed. As a result there were 
issued under agreements with American trust companies, as 
trustees, bearer certificates of small denomination, with divi- 
dend warrants attached, and in form acceptable for listing on 
the Paris Bourse. ‘This transaction, it will be noted, is the 
reverse of that involved in the issue of “American shares.”’ 
The World War, with its consequent financial stringency in 
Europe, has practically put an end to this type of business. 


Foreign insurance trusts.*—Business of this type is re- 
ceived by the trust departments of institutions in the financial 
centers from foreign insurance companies which wish to enter 
into the business of insurance or reinsurance in this country. 
Most of the states will not permit foreign insurance compa- 
nies to write insurance within their borders, unless they have 
qualified under the statutes and pursuant to regulations estab- 
lished by the respective state insurance departments. ‘This 
qualification usually includes the deposit of securities or cash 
as a fund for the protection of policy holders or creditors. In 


4 There is no relation between this type of business and the so-called “in- 
surance trust” established by an individual. 


180 WORK OF CORPORATE TRUST DEPARTMENTS 


New York state part of the fund is required to be deposited 
with the insurance department and the remainder may be 
deposited with three individual trustees or one corporate 
trustee, located in the state of New York. 

The following form of deed of trust is the ‘‘standard” form 
approved by the New York State Superintendent of Insurance. 


STATES OF NEW YORK AND MASSACHUSETTS 


Deed of Trust. 


(To be used by insurance companies of other countries in the appointment of 
a United States corporate trustee, pursuant to the requirements 
of the statutes of such states.) 


(CORPORATE TRUSTEE) 


Tuis INDENTURE, made this day of , in the year one thousand, 
nine hundred and , between , (Here insert the corporate name of the 
company in the English language, adding, if its corporate name is in a foreign 
language, the following: “incorporated under the name of ”) of the city 


of , in the of , a corporation organized under the laws of 
the ot , hereinafter called “the company,” party of the first part, 
and , of the city of , in the State of , a corporation organized 


under the laws of the State of , in the United States of America, here- 
inafter called “the trustee,” party of the second part, WITNESSETH: 


WHEREAS, under and pursuant to the provisions of the statutes of certain 
of the states of the United States, an insurance company organized under 
the laws of a foreign country and transacting business in such states is re- 
quired to maintain in the United States a trust fund for the protection of all 
its policyholders and creditors in the United States, and to appoint a trustee 
or trustees as custodian or custodians of said trust fund; and 


WHEREAS, the company is a foreign insurance company duly organized 


and existing under the laws of , and carrying on the business of 
insurance; 


(Here insert the kinds of insurance business which the foreign corporation is 
authorized to transact under its charter or articles of association.) 


THEREFORE, to the end that the statutes of such states may be fully complied 
with: 

Know ALL MEN By THESE PRESENTS, that, the company has appointed : 
its lawful United States trustee, with this provision, that said trustee or its 
successor be authorized and have the power to receive such securities and 
property as the company from time to time may transfer or remit to or vest 
in said trustee or place in said trustee’s hands or under said trustee’s control, 
and to hold, invest, reinvest, manage and dispose of the same for the uses 
and purposes and in the manner and according to the provisions following, 
namely: 


First: ‘The trustee shall cause the securities and property in which the 
said trust fund shall from time to time be invested to be, so far as practicable, 
entered, registered and kept under the following form or title: ‘The trustee 
by deed of trust for the time being in the United States of the Company.” 


MISCELLANEOUS TRUST FUNCTIONS 181 


SECOND: The trustee shall hold the above-mentioned securities and prop- 
erty and their proceeds as a fund in trust, out of which to pay or cause to 
be paid all lawful and valid claims or demands of policyholders and creditors 
of the company in the United States, or such pro rata share of such claims 
or demands as may be possible to pay therefrom. 


Tuirp: The trustee is authorized and empowered, with the previous writ- 
ten authority of the board of directors or the manager of the company duly 
empowered, or of the United States manager acting under the instructions 
of the company’s board of directors or its duly empowered manager, to be 
signified in writing to the trustee, to sell or collect any security or property 
in the said trust fund, and to invest and reinvest the proceeds thereof in 
such securities or property as are or may be from time to time permitted by 
the laws of the state of the United States where the principal business office 
of the United States branch of the company is located, to the same extent 
and subject to the same restrictions, rules and regulations to which insurance 
companies incorporated in said state are or may be at, any time subject. 


FourTH: ‘The trustee shall from time to time, when required either by 
the company or the United States manager thereof, or by the insurance super- 
visor, whatever his official title may be, of any state of the United States 
where the company is admitted to transact business, make and certify a state- 
ment of the description and amount of the said trust fund, and of items of 
which it may consist, in such detail as may be required; and such certificate 
of description shall be a voucher for said funds to the company or the United 
States manager. 


. FirTH: The trustee is also authorized and empowered, upon the written 
direction of said United States manager authorized as in paragraph third 
hereinbefore provided, from time to time to furnish said United States man- 
ager with property or securities out of said trust fund or any part thereof: 


(1) For making deposits in any state or territory of the United States for 
the benefit and security of all the policyholders and creditors of the company 
in the United States under laws or regulations, now existing or hereafter 
to be established, requiring deposits for the benefit and security of all policy- 
holders and creditors in the United States; and 


(2) Unless — after five days’ written notice of intention from the United 
States manager to the insurance supervisor, whatever his official title may be, 
of the state where the principal business office of the United States branch of 
the company is located — prohibited in writing by such supervisor, for the 
payment of moneys due to policyholders or creditors of the company in the 
United States; and 


(3) If consented to in writing in each case by such insurance superivisor 
and not otherwise: (a) for obtaining loans on pledge of such property or 
securities and for effecting bulk reinsurances of all or any part of the obliga- 
tions of the company on unexpired policies issued through its United States 
branch, provided such loans on pledge or such use for bulk reinsurances shall 
be for the benefit and protection of the company’s policyholders or creditors in 
the United States; (b) for remittance or transfer to the home office of the com- 
pany; or (c) for such other use and in such other manner for the benefit of 
the United States branch of the company as the said United States manager 
may require or direct. 


Sixth: The trustee is also authorized and empowered, upon request of the 
United States manager of the company authorized to that end as in paragraph 
third hereinbefore provided, to pay or deliver any or all income, earnings, 


182 WORK OF CORPORATE TRUST DEPARTMENTS 


dividends or interest accumulations of the securities or property of such trust 
fund to such United States manager and accept his receipt therefor. 


Seventh: The trustee may resign by written resignation, such resignation to 
take effect not less than .... days from the date of the reception thereof by 
the company, and, in case of a vacancy caused by such resignation of a trustee 
or from any other cause, the company shall, subject to the approval of the in- 
surance supervisor specified in paragraph fifth hereof, fill such vacancy by a 
hew appointment, and the powers of the trustee shall survive and continue in 
the succeeding trustee, and every new trustee shall succeed to, take and have 
all the estate, rights and powers which belonged to or were held by and be 
charged with like obligations as its predecessors. But the trustee shall not be 
liable or responsible for any loss to the said trust fund unless the same be 
caused by its neglect or willful malfeasance. ; 

Eighth: The company hereby reserves to itself the right at any time hereafter 
to add to, modify, alter or revoke the trusts, conditions and powers hereinbefore 
declared, imposed or conferred in such manner as it shall deem fit and as shall 
be according to law, provided the rights of its policyholders and creditors in 
the United States shall not thereby be affected or impaired, of which the jn- 
surance supervisor specified in paragraph fifth hereof shall be the judge, and 
of which fact his written certificate to the trustee shall be final and conclusive 
evidence. 

Ninth: The trustee hereby accepts the trust above created and declared 
upon the terms above expressed, and signifies its acceptance thereof by joining 
in the execution of these presents. 

In WITNESS WHEREOF, the company and the trustee have caused 
these presents to be subscribed and their corporate seals to be 


afhxed, the company at , on the day of 19—, and 
the trustee, at , on the day , 19—, 
INSTRUCTIONS 


This DEED OF TRUST must be executed by the foreign company by: 


(a) Affixing its name at the end of the deed of trust,; underneath such name, 
the two officers executing it should sign their names and add the titles 
of their offices, as “President,” “Manager,” “Director,” “Secretary,” 
etc. 

(b) Affixing or impressing the seal of the corporation to the left of the 
signature of the company and its officers. 


(c) Attaching the certificate of a notary public or other officer of the foreign 
government, state, city or district, to the effect that the deed of trust 
was executed by such officers for and on' behalf of such company, on 
the day of the date thereof; that such officers were duly atithorized 
by the board of directors of such company to execute it, and that the 
corporate seal afhxed or impressed is the corporate seal of such com- 
pany and was affixed to or impressed thereon pursuant to action 
of the board of directors of such company. Such certificate must be 
in the English language. 


MISCELLANEOUS TRUST FUNCTIONS 183 


(d) Attaching to the certificate of the notary public or other officer a cer- 
tificate by a United States consul, or vice-consul, identifying the 
notary public or other officer as duly qualified to certify the execution 
of legal documents. (The form usually followed by United States 
consuls or vice-consuls will be enough.) 

This DEED oF ‘TRUST must be executed by the trustee or trustees in accord- 
ance with the laws of the state where the deed of trust is to be first 
filed. 


A trustee under a deed of trust of this nature should famil- 
iarize itself with its state insurance laws and regulations. The 
trust having been established for the benefit of United States 
policyholders and creditors, it is the duty of the trustee to 
see that the fund in its hands is not used for any purpose, 
except as permitted in the deed of trust. ‘These trusts repre- 
sent a very clean and profitable type of business, and often 
carry substantial balances in cash. ‘The foreign insurance 
company is also required to appoint a United States manager, 
and the natural place for the United States manager to carry 
his company’s account is with the institution which is United 
States trustee. Some interesting legal cases have resulted 
from these trusts, particularly with respect to Russian insur- 
ance companies.” 


Escrows.—An escrow is the deposit with a stakeholder of 
cash, securities, title papers or other property, in regard to 
which two or more parties may have conflicting interests. It is 
one of the least profitable types of trust business, and, as indi- 
cated by its nature, one which involves considerable risk. The 
careful trust officer will investigate each escrow which is 
offered, and will act only upon the advice of counsel. In some 
instances the parties at interest will desire to make the escrow 
depositary a party to their agreement which is the basis of the 
escrow. This is not desirable. A deposit in escrow should be 
accepted only subject to a letter of instructions, signed by the 
parties at interest, making reference to no other agreement be- 
tween the parties, and clearly defining the duties of the deposi- 
tary under any conceivable contingency. It is also important 
that the letter of instructions set a time limit and completely in- 
struct the depositary as to the disposition of the property cov- 
ered by the escrow, in case the parties at interest shall fail, 
within the limit fixed, to carry out its terms. In order to avoid 


5 See Russian Reinsurance Company et al. v. Stoddard, 240 N. Y. 149. 


184 WORK OF CORPORATE TRUST DEPARTMENTS 


possible embarrassment to the escrow depositary and to parties 
to the escrow, it frequently is advisable to incorporate in the 
original letter of instructions a clause providing, in substance, 
that the escrow depositary shall not be bound or affected by 
notice of the abrogation or modification of the original escrow 
terms, unless such notice is signed by all parties in interest. 


Registrar of debentures, etc. (for identification). — 
A corporate trust department frequently is asked to act in 
the capacity of registrar for an issue of debentures or other 
obligations, with the duty of countersigning debentures to a 
given amount. Its services under such an arrangement are 
quite different from those of bond registrar which are dis- 
cussed under corporate agency functions, but do comprehend 
a check against an overissue of securities and in that respect 
are comparable to the services of a stock registrar. The de- 
tail work involved under an appointment as registrar for 
identification (comprising the examination, recording, counter- 
signing, and delivering of debentures) is closely akin to the 
work of a trustee in authenticating bonds, Hence, business 
of this kind usually is assigned to the corporate trust depart- 
ment, particularly as the records of that department are 
adapted to fit the needs of the case. 

The appointment of a registrar of debentures is made by 
the issuing corporation’s board of directors, or, in the case 
of foreign governments, by the minister of finance or appro- 
priate governmental body. ‘The registrar’s duties usually con- 
sist merely of signing, for identification, debentures to the 
amount authorized by the appointment. In doing so it signs 
as Registrar of the issue usually in this form. 


“Countersigned: 


NATIONAL TRUST COMPANY 


as Bond Registrar 
by 
Assistant Secretary” 


If the debentures are to be given the benefit of a sinking 
fund or the privilege of conversion into other securities, the 
institution acting as registrar also may be appointed the agent 
of the debtor. Likewise, it may be appointed paying agent 
for the bonds or coupons. However, these functions are apart 
from the duties of the registrar. 


MISCELLANEOUS TRUST FUNCTIONS 185 


The purpose of the arrangement is to provide an indepen- 
dent check on the amount of debentures issued, without the 
formality of a trust agreement. ‘The signature of the regis- 
trar adds to the marketability of the debentures, because it 
carries to the investor an assurance that the authorized amount 
has not been exceeded. 


Conversions.— Many bonds are issued containing a provi- 
sion giving to the holder an option, on stated terms, to con- 
vert such bonds into another class of security of the debtor 
(usually common stock). In such case it is important to 
see that the provisions of the bond and the mortgage are 
specific as to: (1) the period during which such conversions 
may be made; (2) the rate at which the bonds are convertible 
into the other security; (3) the adjustment, if any, to be made 
between the accrued interest on the bonds to the date of con- 
version, and the accrued interest or dividends to the same date 
on the securities to be issued in exchange; and (4) the process 
by which securities are to be obtained with which to accomp- 
lish the conversion when bonds are tendered for that purpose. 

Sometimes it is required that a certain number of days’ 
notice must be given by bondholders who wish to convert their 
bonds into stock. This provision must be carefully observed 
by the trustee or conversion agent, as there might be a sub- 
stantial difference in the value of the stock between the date 
when the bondholder gives notice and the date when his stock 
is issuable. 

The Exchange Record (Form 5, page 40) is adaptable to 
use as a conversion record. In some cases, however, special 
records may be desirable. 


Fiscal agent for municipalities, etc.—As fiscal agent for 
cities, counties, and states, a trust company or bank may per- 
form duties which can hardly be included under “‘agency’’ func- 
tions. The office of the fiscal agent is the usual place of pay- 
ment for the bonds and interest thereon. This may not, and 
usually does not, involve any trust relationship; but the fiscal 
agent frequently authenticates the bonds of a muncipality and, 
clearly, this action brings fiscal agencies within the scope of 
corporate trust department activities. Certain trust compa- 
nies specialize in this class of business just as certain lawyers 


186 WORK OF CORPORATE TRUST DEPARTMENTS 


specialize in passing upon the validity of municipal issues. 
However, this type of business is somewhat afield from the 
ordinary run of corporate trusts. 


Paying agencies— As we have just indicated, paying 
agencies usually do not involve a trust relationship, but 
there are many exceptions to this rule. The question becomes 
of particular importance in case of insolvency of the debtor. 
Regardless of whether funds received for the payment of 
bonds are a deposit in trust, most institutions find it more con- 
venient to have all bond payments made by the corporate trust 
department just as all coupon payments are made by the 
coupon-paying department. Banks and trust companies in the 
financial centers receive a considerable number of bond-paying 
agencies from their correspondent banks in other cities, such 
correspondents being trustees under local issues of bonds 
whose terms provide that payment at maturity may be had in 
the financial centre if the holder so elects. 


CHAPTER XIV 


CORPORATE AGENCY SERVICES; REORGANIZA- 
TION. DEPARTMENT 


Scope of corporate agency services.—The growth of trust 
company business in the field which we discuss under the head- 
ing “Corporate Agency Services” has kept pace with, and, 
in some branches, has exceeded, the development of corporate 
trust business. The term “corporate agencies,” in trust com- 
panies where the corporate trust department is separated 
from the corporate agency department or group of depart- 
ments, usually refers to the activities assigned to the following 
departments or divisions: 


Reorganization. 
Stock Transfer. 
Stock Registration. 
Bond Registration. 
Coupon Paying. 


Division between trust and agency departments.—The 
general practice among large trust companies is to assign to 
the corporate trust department those functions under which 
the trust company assumes a relationship of trust and to deal 
with all or most of the business such as has been mentioned 
above in its corporate agency department. This is logical, 
and, where justified by the volume of business, appears to 
work out very satisfactorily. Such a clear-cut division is not 
always carried out because of practical reasons which may 
render it advantageous for one department to assume duties 
outside the usual scope of its activities. 


Practice—large vs. small companies.— In the smaller trust 
companies, and even in many of the larger companies, where 
most of the trusts are personal, it is usual, and quite properly 
so, to group all corporate activities in one division of the 
trust department. But even so, the trust officer will do well 
to have the logical divisions in mind and so construct his 


187 


188 WORK OF CORPORATE TRUST DEPARTMENTS 


records that they can be subdivided with the least possible in- 
convenience and expense, if the future growth of his company 
should warrant that course. 

In the case of the large companies, some diversity of prac- 
tice will be encountered. For example, the largest trust com- 
pany in the country includes reorganizations and bond regis- 
trations as part of the functions of its corporate trust depart- 
ment. In some companies bond payments are made at the 
corporate trust department, and in others at a joint bond and 
coupon-paying division of the corporate agency department, 
although, in many instances, a trust relationship exists, and, 
for that reason, theoretically, at least, bond payments fall 
within the purview of the trust department. But whether 
the division of functions follows exactly along the lines dis- 
cussed in this book or whether some variations are adopted 
is not a matter of great importance provided the fundamental 
distinction between trust and agency services is always kept 
in mind. 


Investigating offers of new business.—The matter of ex- 
amining into the merits of proposed corporate trusts already 
has been mentioned (page 23). The same policy of caution 
should guide a trust officer in the consideration of business 
offered to the corporate agency department so as to prevent 
the acceptance of business which might reflect unfavorably on 
the fiduciary. | 

In the placing of corporate agency business (particularly 
transfer agencies and registrarships), corporations generally 
exercise a larger measure of control than they do in the case 
of corporate trusts, where the trustee is usually nominated by 
the bankers who underwrite the bond issue. Much corporate 
agency business, however, develops through the good offices 
of the underwriting houses, who frequently are in a position 
to suggest the name of the fiduciary. 


Reorganization department.—The reorganization depart- 
ment of a modern trust company, whether attached to the 
corporate trust department or placed with corporate agency 
group, ordinarily takes charge of the following types of busi- 
ness: . 

Corporate reorganization.—As here used the word “reor- 
ganization” is intended to denote the rearrangement of the 


CORPORATE AGENCY SERVICES 189 


capital structure of a corporation, involuntary as regards the 
corporation, and usually effected through the legal enforce- 
ment of the rights of one or more classes of security-holders 
or creditors. In nearly all such cases the foreclosure of one 
or more liens is involved and the reorganization results in the 
formation of a new corporation, pursuant to a plan of reor- 
ganization submitted by committees representing various 
classes of security-holders and creditors. 

Corporate readjustments.—In contrast to the use of the 
word “reorganization,” “readjustment” is the term used to 
indicate the rearrangement of the capital structure of a cor- 
poration which is voluntary in nature, and consummated with- 
out the enforcement of the legal remedies of security-holders 
or creditors, often before the happening of an event upon 
which the enforcement of any remedies might be predicated. 
A readjustment may be effected with or without the inter- 
vention of committees representing the security-holders and 
creditors, but in nearly all cases with the aid of trust companies 
as depositaries. 


Capital subscriptions.—It is now a well established practice 
of corporations, planning to issue new or additional securi- 
ties and to extend to existing security-holders the right to 
subscribe to the new security, to make use of a trust com- 
pany’s service as subscription agent. In the case of stock 
issues (or, possibly, the issue of bonds which, by their terms, 
are convertible into stock of the debtor corporation) it is the 
general rule, by statute in some states and under common law 
in other states, that the right to subscribe to the new security 
shall, in the first instance, be extended to existing stockholders 
in proporion to their holdings. 


Reorganizations.—It is in its capacity as depositary in con- 
nection with reorganizations that the reorganization division 
often comes in close contact with the corporate trust depart- 
ment. As previously stated, reorganizations, within the mean- 
ing of this discussion, are ordinarily consummated through 
the enforcement of the lien of one or more mortgages, or 
the legal remedies of one or more classes of creditors. Usually 
one or more trust companies stand as trustees for the bond- 
holders (or creditors—such as noteholders or secured cre- 
ditors) whose remedies are to be enforced. 


190 WORK OF CORPORATE TRUST DEPARTMENTS 


Perhaps the trust company which is acting as depositary 
is also mortgage trustee. In its capacity as depositary it will 
have dealings with the bondholders who codperate with the 
committee, and with itself as trustee on behalf of all of the 
bondholders. These activities of the depositary should be kept 
wholly separate and apart from those of the trustee. In a 
situation of this kind the advantages of making a clear dis- 
tinction between trust and agency functions are apparent. : 

Ordinarily, the initial step of a reorganization takes place 
when the corporation has failed to pay, when due, one or 
more of its obligations for principal or interest on its out- 
standing indebtedness. Dividends on stock and interest on 
income bonds are not fixed charges, and failure to meet such 
payments does not constitute a default pursuant to which an 
involuntary reorganization may be brought about. At times 
the proceedings for reorganization are commenced before 
actual default has occurred, but when it is apparent that the 
company’s financial situation is such that default is inevitable. 
In such a situation it is usual for the bankers who originally 
sold to the public the various classes of the company’s securi- 
ties to confer with the officials of the company as to the ap- 
pointment of a receiver’ and at or about the same time the 
bankers usually will take steps to organize protective com- 
mittees for the holders of the various classes of securities. 


Protective committees.— As its name implies, such a com- 
mittee is organized to protect, through the process of reor- 
ganization, or otherwise, the interests of the security-holders 
it represents. Ordinarily, a protective committee, as distin- 
guished from a reorganization or readjustment committee, 
later discussed, will represent the holders of only one class 
of security, and, consequently, there are often as many com- 
mittees in the field as there are classes of securities of a 
given company. Any attempt by a protective committee to 
represent two or more classes of securities may well subject 
the committee to criticism by the security-holders and may 
also be frowned upon by the courts, because in the very na- 
ture of an involuntary reorganization there is bound to be 


1 James Byrne, “Some Legal Phases of Corporate Financing, Reorganization 
and Regulation,” pages 77 et seq. 


CORPORATE AGENCY SERVICES 191 


more or less conflict between the interests of the holders of 
the several classes of securities. 

The natural assumption is that such committees would be 
appointed by the great body of holders of the securities of 
the respective classes. However, as bond and note issues are 
ordinarily in bearer form, it is not possible to reach many of 
the holders except after long and expensive advertising. Even 
in the case of stock and other registered security issues, human 
nature is such that it is next to impossible to secure prompt, 
effective, and united action, acute though the situation may 
be. Consequently, the bankers referred to above will usually 
consult a few of the larger known holders of the issue in which 
they are interested, and select the committee, the members 
being, or representing, large holders, the bankers who sold the 
issue, and sometimes (in the case of bond or note issues) the 
trustee. The advisability of the trustee accepting representa- 
tion on the committee is open to some question, although the 
practice has many advantages, both to the committee and the 
trustee. The proceedings advocated by the committee will, 
with but few exceptions, need to be taken through the trustee. 
Consequently, a close working contact between these two 
parties is highly desirable. The other side of the picture, 
however, is that the committee represents only such holders 
as may, by depositing their securities under the deposit agree- 
ment—next discussed—authorize the committee to act for 
them, while the trustee is the legal representative of the in- 
terests of the whole body of holders of the issue in question, 
known or unknown. For this reason, a careful trustee, if it 
accepts representation on such a committee, will do so only 
on the distinct understanding that its representative shall be 
free to resign membership, if at any time an opposition com- 
mittee is organized to represent the same issue, or any other 
situation arises which, in the judgment of the trustee, may 
cause embarrassment to it or to its representative on the com- 
mittee. This situation is often satisfactorily met by having 
a member of the trustee’s organization accept the secretary- 
ship of the committee. ‘The secretary’s duties are merely 
ministerial and not representative, but his office provides a 
means for close contact between the trustee and the com- 
mittee. 


192 WORK OF CORPORATE TRUST DEPARTMENTS 


A similar question arises if counsel to the trustee is asked 
to act for the committee, and any acceptance by counsel should 
carry the reservations just suggested with respect to the trus- 
tee’s representation on the committee. 


A protective committee, at its organization meeting, will 
usually elect one of its members as chairman, and select coun- 
sel, one or more depositaries, and a secretary. Its next step 
is to adopt a form of deposit agreement and to arrange for 
the publication and mailing of a notice (see below) addressed 
to the holders of the securities it represents, advising them 
of the situation which calls for organized effort to protect 
their interests, the formation of the protective committee, and 
its personnel. ‘The notice ordinarily invites the immediate 
deposit of the securities in question, with the committee’s 
depositary. It will also state that copies of the deposit agree- 
ment may be had on application to the secretary or the de- 
positary, and, in addition to the names (and usually the busi- 
ness connections) of the committee members, will give the 
names and addresses of the depositary, counsel and secretary. 


Notice cf Protective Committee. 


PROTECTIVE COMMITTEE 
THE CENTRAL RAILWAY COMPANY 


FIRST MORTGAGE FIVE PER CENT 50-YEAR GOLD BONDS 


New York City, January 20, 1925. 
To the Holders of 


The Central Railway Company 
First Mortgage Five Per Cent 50-Year Gold Bonds: 


Default having occurred in the payment of interest due June 1, 1924, and 
December 1, 1924, upon the First Mortgage Five Per Cent 50-Year Gold Bonds 
of The Central Railway Company, the undersigned Protective Committee has 
been formed in order that the holders of the said bonds may take concerted 
action for the protection of their interests. 

Bondholders are invited to deposit their Bonds with National Trust Com- 
pany at 200 Wall Street, New York City, as Depositary under a Deposit 
Agreement dated as of December 11, 1924. Copies of this Deposit Agree- 
ment may be obtained from the Depositary or from the Secretary of the 
Committee. Bonds must be accompanied by the coupons due June 1, 1924, and 
all subsequent coupons; Bonds registered as to ownership must be accompanied 
by properly executed transfers thereof in blank. ‘Transferable certificates of 
deposit will be issued for the Bonds deposited. Application has been made 
to list such certificates of deposit on the New York Stock Exchange. 

All the property and assets of The Central Railway Company have been 
acquired by the New York and San Francisco Railroad Company, which has 


CORPORATE AGENCY SERVICES 193 


assumed the payment of the Central First Mortgage Bonds. On July 25, 
1923, a Receiver was appointed for the Railroad Company in a suit brought 
by general creditors. ‘The Receiver paid the interest due upon the Central 
First Mortgage Bonds on December 1, 1923, but subsequent installments of 
interest have not been paid. There have also been defaults in the payment of 
interest upon practically all the outstanding bonds or other obligations, issued 
or assumed by the New York and San Francisco Railroad Company. 

Since the appointment of the Receiver, a number of suits have been brought 
to foreclose mortgages securing other outstanding issues of Bonds, and the 
receivership has been extended to such foreclosure suits. No such suit has 
been brought to foreclose the Central First Mortgage. In order that the 
interests of the holders of the Central First Mortgage Bonds may be ade- 
quately protected in the receivership proceedings, it is essential that a suit 
to foreclose the said Mortgage should be brought as promptly as possible. 
The provisions of the Mortgage make it doubtful whether such a suit can 
be instituted except through the action of the holders of at least 50 per cent 
in amount of the Bonds secured thereby. Approximately one third of the 
outstanding Bonds have now been deposited with the Committee’s Depositary. 
In order to enable the Committee to cause foreclosure proceedings to be in- 
stituted as soon as possible, Bondholders are urged to deposit their Bonds 
immediately. 

The prompt deposit of Bonds is essential also to enable this Committee 
effectively to participate in the formulation of a plan of reorganization. The 
other classes of securities will be represented by committees organized to assert 
their rights, and it is distinctly to the interest of the holders of the 
First Mortgage Bonds that they should be similarly represented. Pre- 
liminary investigations already made by this Committee show the necessity 
of prompt action with respect to a plan of reorganization. ‘The Receiver is 
now operating the road at a loss. He estimates that for the calendar year 
1925 the books will show an operating deficit of approximately $500,000. 
Receiver’s certificates having a lien prior to all mortgages are now out- 
standing in the amount of $950,000, and the Receiver expects to apply for 
authority to issue additional certificates within the next few weeks. An 
indefinite continuation of the present state of affairs cannot fail injuriously 
to affect the interest of Bondholders. 

The Deposit Agreement provides that the maximum expense which may be 
charged against any depositor will not exceed 2 per cent of the face amount 
of his Bonds. 

For the above reasons, Bondholders are urged to deposit their Bonds with- 


out delay. 


Henry Grey, Secretary, GeorcE E. Hiti, Chairman, 
130 Pine Street, New York City. Hill & Son 
Root, CasE & GARDINER, Counsel, WILLIAM C. Brown, 
. Lae CAA Finance Committee, 
NATIONAL TrRusT COMPANY, Depositary, Coot eaT NARA Tate Tag Oo: 


200 Wall Street, New York City. 
DANIEL J. MorGan, 
Treasurer, New Haven Fire Insur- 
ance Co, 


R. G. READ, 
Vice President, 
National Trust Company 
Committee 


194 WORK OF CORPORATE TRUST DEPARTMENTS 


Deposit agreement.*—Such an agreement evidences the 
contract between the committee and the depositing security- 
holders who receive, in lieu of their securities, transferable re- 
ceipts known as certificates of deposit. Forms of certificates 


of deposit follow: pe 
Fig. 9.—Certificate of Deposit (Bonds). 
Number 
CERTIFICATE OF DEPOSIT 
$1000 for 444% Convertible Gold Bond $1000 
Due June 1, 1942 
of 


NEW YORK AND SAN FRANCISCO RAILWAY COMPANY 
(With coupon maturing June 1, 1925, and all subsequent coupons attached) 
Issued under an Indenture of said New York and San Francisco Railway 

Company, dated June 1, 1912, to Consolidated Trust Company, of New York as 
Trustee and deposited under and subject to a Plan and agreement dated June 1, 
1925, for the Reorganization of New York and San Francisco Railway Company. 


NATIONAL TRUST COMPANY 


HEREBY CERTIFIES THAT it has received one bond of the issue aforesaid 
NUMBERED of the face value of principal of — ONE THOUSAND DOLLARS — 
with coupons attached as above stated. Said bond has been deposited subject 
to the terms and conditions of and is deliverable as stated in the above- 
mentioned agreement. ‘The holder hereof assents to and is bound by the 
provisions of said agreement by receiving this certificate and is entitled to 
receive all the securities, benefits, and advantages to which the depositor of such 
bond is or may become entitled pursuant to the provisions of said agreement. 
The interest represented by this certificate is transferable, subject to the terms 
and conditions of said agreement, by the delivery of this certificate. ‘This 
certificate may be registered as to ownership, but after registration no transfer 
except on the books of the Trust Company shall be valid unless the last trans- 
fer be to bearer, when the Certificate will be transferable by delivery as before. 


New York, 


Registered: NATIONAL Trust CoMPANy, Depositary 
National Commercial Bank, Registrar 
By By 

Assistant Cashier Assistant Secretary 


This certificate is not valid until signed by the Depositary and registered 
by the Registrar. 


Fig. 10.—Certificate of Deposit (Stock). 


CERTIFICATE OF DEPOSIT —— Shares 
FOR STOCK OF 
NEW YORK STEEL COMPANY 


deposited under and in accordance with the terms of a certain Deposit Agree- 
ment dated June 19, 1925, between William H. Tree, Samuel Hill, and Morgan 
H. Green as a Committee, parties of the first part, and such stockholders of the 
New York Steel Company, as shall become parties thereto in the manner therein 
provided, parties of the second part. The purpose of said Deposit Agreement 


No. 


2 See pages 423 et seq. for form of a typical deposit agreement. 


CORPORATE AGENCY SERVICES 195 


is to facilitate the proposed merger of New York Steel Company and Central 
Metals Corporation into one Company to be known as Central-New York 
Metals Company. ‘The original Deposit Agreement has been lodged with 
National Trust Company, the depositary named therein. 


NATIONAL ‘TRUST CoMPANY, as Depositary, 


HEREBY CERTIFIES that it has received and holds for account of a cer- 
tificate or certificates representing Shares of stock of New York Steel 
Company, subject to the terms and conditions of the above-mentioned Deposit 
Agreement. The holder hereof by receiving this certificate assents to and is 
bound by the provisions of the said Deposit Agreement and is entitled to 
receive all the securities, benefits, and advantages to which the depositor of 
said stock is or may become entitled pursuant to the provisions of said Deposit 
Agreement. ‘This certificate and all rights and interests represented hereby are 
transferable subject to the terms and conditions of said Deposit Agreement on 
the books of the undersigned by the holder hereof in person or by attorney, 
upon surrender hereof duly endorsed. 


New York 


NATIONAL TRUST CoMPANY, Depositary 
By 


Assistant Secretary 


The deposit agreement is the committee’s warrant of au- 
thority.° The parties to such an agreement are (1) the com- 
mittee, and (2) the holders of certificates of deposit issued 
in lieu of the deposited securities. The fact that the persons 
who deposit the securities do not necessarily remain parties 
to such an agreement is of sufhcient importance to warrant 
repetition. Such an agreement should be most carefully drawn 
to cover with legal completeness the authority of the commit- 
tee; the procedure by which holders of certificates of deposit 
may become bound by the terms of any plan of reorganization 
adopted by the committee; the right, if any, of the holders of 
certificates of deposit to withdraw deposited securities; the 
method of notifying the holders of certificates of deposit of 
the adoption of a plan and of other matters which it is neces- 
sary to bring to their attention; the right of the committee to 
reimbursement for its expenses and payment of its fair com- 
pensation; and the duties and responsibilities of the depositary. 
Some of the terms of such an agreement involve legal ques- 
tions which are of the utmost importance to the committee, but 
are hardly within the scope of this discussion which aims to 
consider points of the most interest to a depositary. The 
oficer accepting on behalf of a trust company an appointment 


3See Mr. Paul D. Cravath, “Reorganization of Corporations,” in “Some 
Legal Phases of Corporate Financing, Reorganization and Regulation,” pp. 162 
et seq. 


196 WORK OF CORPORATE TRUST DEPARTMENTS 


as depositary under such agreement will secure approval by his 
counsel of the provisions affecting the depositary, and will be 
interested primarily in seeing that the duties and responsibili- 
ties of the depositary are clearly and completely stated. 

In passing, it is worthy of note that the investing public 
is insisting with increasing vigor that deposit agreements shall 
contain clear and workable provisions providing: (1) that 
the holders of certificates of deposit shall have the right of 
withdrawal, on payment of a pro rata share of the commit- 
tee’s expenses and compensation to date, if any plan of re- 
organization submitted by the committee shall not prove ac- 
ceptable; and (2) that the total amount which the holder of 
a certificate of deposit may be required to pay toward the ex- 
penses and compensation of the committee shall be specifically 
limited, ordinarily to an amount not exceeding, say, 2 per cent 
of the face amount of the deposited securities. 


Activities of depositary.— ‘The various phases of a reor- 
ganization, prior to the adoption of a plan of reorganization, 
can be indicated by a brief’explanation of the activities of the 
depositary. 


Subdepositaries—In cases where large blocks of securities 
to be covered by a deposit agreement are held in cities other 
than the city in which the depositary is located, it is customary 
to appoint trust companies in one or more of such cities as sub- 
depositaries. ‘This is a convenience to the security-holders and 
should result in increased deposits. ‘The deposit agreement 
generally provides the method for the appointment of sub- 
depositaries; either by the main depositary, or by the commit- 
tee direct. ‘The former method is advantageous both to the 
committee and to the depositary, for these reasons: first, the 
committee will look to the main depositary to transmit instruc- 
tions to its agents, and, second, all securities held by the sub- 
depositaries will be subject to the order of the main depositary. 
Certificates of deposit sometimes are issued by the subdeposi- 
taries as agents for the main depositary; but it is considered 
preferable to have only one type of certificate outstanding, to 
which end the main depositary issues its certificates upon ap- 
propriate requisition of the subdepositaries as they receive 
deposits. 

It is essential that there be a complete system of reports 


CORPORATE AGENCY SERVICES 197 


between the subdepositaries and the depositary, so that the 
latter shall be in a position promptly to certify to the com- 
mittee any details as to the deposit of securities. 


Listing of certificates of deposit.‘—If the securities of the 
issue to be deposited are listed on a stock exchange, the pro- 
tective committee will probably determine to apply promptly 
for listing the certificates of deposit. As the listing will result 
in the certificates of deposit having as ready a market as the 
undeposited securities, such action is advisable as an induce- 
ment to deposit, as security-holders are reluctant to exchange 
a readily marketable security for a certificate of deposit un- 
less that, too, has equal trading conveniences. 


Reluctance of security-holders.—While the listing of certi- 
ficates of deposit covering listed securities is an important 
factor in inducing deposits, the lower market quotation for 
the certificates of deposit deters many security-holders from 
depositing. Due to the usual provision in deposit agreements 
that holders of certificates of deposit are obligated to pay a 
pro-rata share of the expenses and compensation of the pro- 
tective committee, up to a stated percentage (ordinarily not 
more than 2 per cent) of the principal of the deposited 
securities, the market quotation for certificates of deposit will 
usually be under the quotation for undeposited securities, by 
an amount approximating the maximum liability for ex- 
penses provided by the deposit agreement. A hesitancy to 
exchange securities for certificates of deposit having a lower 
market valuation is characteristic of many security-holders. 
Frequently the philosophy of the person who withholds de- 
posit for this reason is that there are undoubtedly plenty of 
other holders of the issue in question who are willing to ac- 
cept the inconvenience of a lower market quotation, for the 
sake of the benefits eventually to accrue to all holders through 
a reorganization. When the reorganization has reached its 
final stage, so that this person may with reasonable certainty 
feel that his security will be subject to the market handicap 
for a short time only, he will deposit and, if necessary to par- 
ticipate in the benefits of the reorganization, pay his share 
of the expense. 


4 See pages 441 et seq. for listing requirements of New York Stock Exchange. 


198 WORK OF CORPORATE TRUST DEPARTMENTS 


The holder of securities of a company facing the prospect 
of reorganization should recognize that the situation is one 
where there is little or nothing that he personally can do to 
protect his interests, and where, furthermore, the interests 
of all of the holders of the issue in question can be protected 
efficiently only through united effort. The committee’s ef- 
fectiveness in negotiations for reorganization is often in direct 
proportion to the percentage of the issue deposited, and in 
many cases the written instructions of the holders of a speci- 
fied percentage of the entire issue are required as a prerequis- 
ite to setting the trustee in motion. 

To put the matter differently, it would seem that the holder 
of securities of a company facing reorganization has two 
logical courses: one to sell his securities and take his loss, and 
the other (provided he is satisfied with the personnel and 
ability of the protective committee) promptly to deposit and 
so join with the other holders of the issue in an intelligent 
effort toward mutual protection. ‘The foregoing is not in- 
tended to carry the inference that the efforts of reorgani- 
zation committees are uniformly successful. There are cases 
where the security-holder has profited by withholding codper- 
ation; but, from the point of view of the security-holder, such 
results are fortuitous, unless codperation is withheld through 
a lack of confidence in the committee which later events 
prove to have been justified. 


Registration of certificates of deposit—As previously 
stated, the New York Stock Exchange requires an independent 
registrar for securities which it lists.” The same requirement 
is made by other exchanges. Consequently, if the certificates 
of deposit are listed, usually it will be necessary for the com- 
mittee to appoint, as registrar of the certificates, a financial, in- 
stitution other than the depositary. The depositary then sub- 
mits to the registrar, for registration, all certificates of 
deposit issued. The registrar of certificates of deposit has 
approximately the same duties as the registrar of stock.® 

Mailing and publishing of notice——The depositary main- 
tains the official record of deposits, and usually the commit- 
tee gives all required notices to depositors through the depos- 


> The New York Stock Exchange requirements appear on pages 441 et seq. 
6 See pages 272 et seq. 


CORPORATE AGENCY SERVICES 199 


itary. The ordinary procedure is for the secretary of the 
committee to present the notice, in form approved by the com- 
mittee, to the depositary, with the committee’s instructions 
that the notice be mailed to all holders of certificates of de- 
posit, as their names and addresses appear on the records 
of the depositary at the close of business on a specified date. 
If the notice is one of the formal notices, required by the 
deposit agreement to be given to holders of certificates of 
deposit as a precedent to proposed action by the committee, 
the depositary will be requested to see that one of its com- 
petent employees makes an appropriate affidavit of the facts 
of the mailing, so that if, later, it becomes necessary for 
the committee to prove the mailing of the notice, suitable 
evidence may be available. 

The method by which notice to holders of certificates of 
deposit shall be given by the committee should be prescribed 
by the deposit agreement, and, in the case of all formal 
notices, the provisions of the deposit agreement should be 
rigidly followed. While the obligation in this respect is 
that of the committee, the careful depositary will check to 
see that such provisions have been complied with, so that 
possible embarrassment both to the committee and itself may 
be avoided. Many deposit agreements require publication 
as well as mailing of notice, and in such cases the secretary 
of the committee will usually attend to the publication, al- 
though at times the depositary is requested to see to the 
publication as well as the mailing of notices. If the deposi- 
tary handles the publication, it should see to it that the pro- 
posed dates, places, and media of publication fully cover the 
requirements of the deposit agreement, securing, in due course, 
from the papers carrying the notice, affidavits of publication 
in duplicate—one set of the affidavits to be retained in its 
files as depositary, and the other to be transmitted to the 
committee. 


Relationship between depositary and committee’s secretary. 
—Ordinarily, the contact between the depositary and the 
committee is through the committee’s secretary. If experi- 
enced in the work, the secretary can do much to make the 
depositary’s work run smoothly, and, by the same token, if 
the secretary is not conversant with reorganization work, 


200 WORK OF CORPORATE TRUST DEPARTMENTS 


the experienced depositary can be of much assistance to him 
and, through suggestion and advice, do much toward facili- 
tating the detail work between the committee and depositary. 


Interest and other payments.—At times a committee may 
collect sums on account of unpaid interest on the principal 
obligation, or even a partial payment on account of principal. 
It is usual for the committee to pay such sums to the deposi- 
tary with instructions to it to make pro rata distribution to 
the holders of certificates of deposit. Except in unusual cases, 
such payments are made only on presentation of the outstand- 
ing certificates of deposit for appropriate endorsement, such 
endorsement giving notice to all subsequent holders of the 
certificate of deposit that distribution has been made. Excep- 
tions would be only in the case of fully registered certificates 
of deposit which by their terms provide for such payments 
without endorsement. 

Another somewhat common practice is for the protective 
committee, acting under authority contained in the deposit 
agreement, to pledge the deposited securities and borrow 
funds to pay interest, as it matures on such securities. In 
that event the committee will notify holders of certificates of 
deposit of the arrangements made, and of the holder’s option 
of receiving an advance on account of matured interest, pro- 
vided the certificates of deposit are presented for appropriate 
endorsement by the depositary. ‘The holder of a certificate 
of deposit so endorsed, is required, in case he withdraws 
his deposited securities, in accordance with the provisions 
of the deposit agreement, to pay to the committee, in ad- 
dition to his pro-rata share of the committee’s expenses and 
compensation, the amount of such advance with interest to 
date of repayment.” Similarly, upon completion of the re- 
organization, proper adjustment is made in the distribution 
of the new securities between certificates of deposit bearing 
endorsement of such advances and unendorsed certificates. 
In other words, the scheme may be more or less a matter 
of robbing Peter to pay Paul, for, while intended to supply 
those who are in need of the income with the equivalent of 
the income on the deposited securities during the process of 
reorganization, the recipient of the advance may find that he 


7 See Article XI of Deposit Agreement, p. 434. 


CORPORATE AGENCY SERVICES 201 


has been living on principal instead of income, if the plans of 
the committee miscarry. 


Acceptance of certificates of deposit of other committees.— 
In reorganizations, particularly of the larger companies, it 
sometimes happens that two or more committees are in the 
field representing the same issue of securities, usually pro- 
fessing somewhat different aims in reorganization. There 
then develops a contest between these committees to represent 
the largest percentage of the issue in question. To cover 
this situation, and to provide for a security-holder who has de- 
posited with one committee but who has subsequently become 
convinced that his interests will be more ably protected by a 
second committee, most deposit agreements now permit the ac- 
ceptance of certificates of deposit of other committees, repre- 
senting securities of the same issue, in lieu of the actual 
securities. In discussing the deposit agreement (page 196) 
mention was made of the right of withdrawal. Deposit agree- 
ments, as a rule, do not permit withdrawal of deposited securi- 
ties, except during a specified period following the presen- 
tation of a reorganization plan, and then only upon the con- 
ditions and the payment provided by the agreement. The 
acceptance, therefore, of the deposit of a certificate issued 
by another committee requires: (1) a proper notation on 
the certificate of deposit issued in exchange, to the effect, 
(a) that the certificate is issued against the certificate of 
deposit of another committee and not the actual securities, 
and (b) that the committee is authorized, at the proper time, 
to withdraw the actual securities from the first committee 
and to pay whatever expense is involved for the account of 
the holder of its certificate of deposit; and (2) a careful 
watch of the progress of the reorganization, so that the 
opportunity to withdraw the securities from the first com- 
mittee’s deposit agreement shall not be overlooked. While 
the responsibility for all such matters is on the committee, 
the efficient trust company as depositary will carefully follow 
a situation of this kind to prevent possible difficulties both 
to the committee and itself. 


Certification as to deposits—In the course of most reor- 
ganizations, a committee representing bonds or notes will 
wish to give certain instructions to the trustee of the issue. 


202 WORK OF CORPORATE TRUST DEPARTMENTS 


As explained in Chapter X (page 146) the default provisions 
of a mortgage ordinarily stipulate that, while the trustee in 
certain contingencies may take action in its discretion, it shall 
take the required action on receipt of written instructions 
from the holders of a specified percentage of the outstanding 
bonds, and, if it so requires, upon receipt of indemnity satis- 
factory to it. Consequently, when the committee desires to 
instruct the trustee, for example, to commence foreclosure 
proceedings, it will require of the depositary its formal cer- 
tificate to evidence the amount of bonds on deposit with the 
committee. This certificate may be used by the committee 
not only as the basis for its instructions to the trustee, but 
also as evidence in connection with indemnity which the trustee 
may require. If the committee represents a substantial ma- 
jority of the bond issue, and if the position of the issue in 
the pending reorganization is fairly strong, the trustee usually 
will accept the pledge of the deposited bonds as security for 
the indemnity which it requires. ‘This indemnity is to protect 
the trustee for its liability, expenses, and compensation, in 
connection with the action requested by the committee. The 
bonds can be so pledged, however, only if the deposit agree- 
ment has specifically given to the committee the right so to 
use the bonds. If such indemnity is given, and accepted by 
the trustee, the trustee will promptly notify the depositary of 
its lien on the deposited bonds, and it then becomes the obli- 
gation of the depositary to see that this lien is satisfied before 
it releases the deposited bonds for any purpose. 


Summary of depositary’s functions prior to reorganization. 
—At this point it might be well briefly to summarize the 
functions just discussed which, generally speaking, represent 
the depositary’s duties prior to the presentation of a reor- 
ganization plan: 

1. Receive an executed counterpart of the deposit agree- 
ment (with a supply of copies for distribution) as evidence 
of the agreement between the committee and the holders of 
the certificates of deposit to be issued and, also, as evidence 
of the appointment of the depositary. 

2. Receive from the committee copies of its notice of 
organization, with details of publication thereof and, for dis- 


CORPORATE AGENCY SERVICES 203 


tribution, a supply of copies of any circular letter issued by 
the committee. 

3. Receive from its counsel approval on its behalf of the 
form of deposit agreement, notice, and circular. The form 
of such papers is usually examined by the depositary in 
advance of execution or issue. While there is, perhaps, no 
basis for the depositary insisting upon passing on the form 
of the committee’s notice and circular, there should be the 
closest possible codperation between the committee and its 
agent, the depositary, and these forms are usually submitted 
to the depositary for criticism or suggestions. 

4. Accept deposit of securities of the issue covered by 
the deposit agreement and issue its certificates of deposit 
(see Figs. 9 and 10, pages 194 and 195). 

5. Enter the full name and address of the depositor with 
the details of deposited securities, such as amount and cer- 
tificate or bond numbers on the depositary’s records.® 

6. If bearer certificates, with the right of registration, or 
fully registered certificates, are adopted, the depositary should 
be prepared to record registrations and transfers on forms 
as explained in Chapter XVIII (page 272). In most cases 
of the deposit of bonds the bearer form of certificate of de- 
posit (sometimes with the privilege of registration) is used. 

7. If the certificates of deposit are to be listed on a stock 
exchange, the depositary will furnish to the committee for 
submission, with its listing application, a certificate of the 
amount, and, if required, the details of deposits to the date 
of application, and will agree to notify the listing committee, 
periodically, of additional deposits. The New York Stock 
Exchange has certain requirements as to the form of certifi- 
cates of deposit which it will list.° Most trust companies in 
New York handling this type of business in any volume have 
a standard form of engraved certificate of deposit satisfac- 
tory to the Stock Exchange, upon which it is necessary to 
print only the details of the issue. 

8. In the event that a separate registrar is required to 
comply with the regulations of the Stock Exchange, the de- 
positary will see that a registrar is formally appointed by the 


8 See Chapter XVI, pages 220 et seq. 
9See page 446, ; a ocd 


204 WORK OF CORPORATE TRUST DEPARTMENTS 


committee, that the certificate of deposit contains proper pro- 
vision for the signature of the registrar, that mutually satis- 
factory arrangements are made between the depositary and 
the registrar for the certification to the registrar of the 
amount of deposits on the basis of which the registrar signs 
the certificates of deposit, and that no certificates of deposit 
are delivered until properly signed by the registrar. 

9. From time to time, on the request of the committee, 
the depositary will furnish certified lists of the depositors, 
or, as is more usually the case, will, on instructions of the 
committee, attend to the mailing of circular letters to deposi- 
tors and submit to the committee, if required, affidavits of 
mailing. In cases where a list of the holders of the unde- 
posited securities is available, the committee will often deliver 
a copy of such list to the depositary and request it also to 
attend to the mailing of its communications to the holders 
of undeposited securities. Such lists, other than stockholders’ 
lists taken from the stock ledgers, are usually far from accu- 
rate, and the careful depositary will see that every effort is 
made to build up an accurate list from correspondence with 
security-holders and from other sources. 

10. A depositary will receive numerous letters from hold- 
ers of undeposited securities inquiring as to the situation of 
the company, the standing and aims of the committee, and 
the progress of the proposed reorganization, as well as letters 
from depositors on the latter point. In replying to this cor- 
respondence, it is well for the depositary to keep in close 
touch with its counsel and with the committee, usually through 
the latter’s secretary or counsel. Care and tact in handling 
these inquiries will often be of material assistance not only 
to the committee but to the security-holders themselves. 

11. If the committee collects and decides to disburse to 
the holders of its certificates of deposit funds on account of 
principal, interest or dividends, the depositary will receive such 
funds from the committee and disburse them on the commit- 
tee’s instructions, making appropriate endorsement on the cer- 
tificates of deposit upon which such payments are made. 


Time for deposits.—Generally the committee’s first request 
for deposits does not specify a time limit; but, when the 
committee’s plans for reorganization begin to take definite 


CORPORATE AGENCY SERVICES 205 


shape and the committee feels that it is about ready to present 
a formal plan of reorganization, it usually will notify non- 
depositors, by publication or otherwise, that, after a certain 
date, deposits will no longer be received, or will be received 
only upon terms to be imposed by the committee. The fixing 
of such a date usually results in additional deposits, as, un- 
fortunately, many security-holders dislike to deposit until the 
last moment. The committee of course has the right, which 
it often exercises, of extending the time limit. Usually, even 
after the expiration of the final date, the committee will con- 
tinue to accept deposits until consummation of the reorgani- 
zation, upon payment of a specified penalty. 


CHAPTER XV 
REORGANIZATIONS (Continued) 


Presentation of the plan.—When the committee, either by 
itself or in codperation with other committees or interests, 
has worked out a plan of reorganization, it will deposit a 
copy of the plan with the depositary, and publish the notice, 
required by the deposit agreement." The committee in prac- 
tically every case will be required to mail a copy to each 
holder of a registered certificate of deposit. As a matter of 
good practice, the committee will often mail a copy of the plan 
to each depositor appearing on the records of the depositary. 
Ordinarily, the deposit agreement will provide that, for a spec- 
ified period, say 30 days, from the date of first publication or 
mailing of notice, the holders of certificates of deposit who 
do not approve of the proposed plan may, upon surrender 
of their certificates of deposit and payment of their pro-rata 
share of the compensation and expenses of the committee, 
not exceeding the limit fixed by the deposit agreement, with- 
draw their securities and so become freed of any obligation 
to the committee. While a deposit agreement may not specific- 
ally cover the point, a committee, as a rule, will not attempt 
to consummate a plan, if a substantial part of the deposited 
securities are withdrawn upon submission of the plan. 


Dissents.—Many of the newer deposit agreements do not 
give the right of actual withdrawal until a plan of reorgani- 
zation is declared to be operative, but do provide that, during 
the prescribed period following announcement of the plan, 
holders of certificates of deposit may, if they so desire, file 
with the depositary their written dissent to the proposed plan,’ 
and, if such dissents, representing, say, a majority of the 
deposited securities, are filed, the committee shall declare the 
proposed plan abandoned, and, at its option, work out another 


1 See provisions of typical deposit agreement, p. 423. 
2 See Art. VII of the typical deposit agreement, p. 429. 


206 


REORGANIZATIONS 207 


plan. If the dissents filed are not in an amount sufficient to 
cause the committee to abandon the plan, the committee will, 
by notice, as required by the deposit agreement, declare the 
plan operative. In that event, the holders of certificates of 
deposit, who filed written dissents, will have a further period, 
specified in the deposit agreement, in which to withdraw their 
securities, upon payment of their share of the committee’s 
compensation and expenses, as fixed by the committee within 
the limits prescribed in the deposit agreement. 


Joint reorganization committee.— At this point it might 
well be said that, while in the case of smaller companies, a 
reorganization plan is often worked out by one committee 
and approved or assented to by the other committees in the 
field, a much closer codperation between committees is re- 
quired in reorganizing larger companies. Frequently the 
various committees involved in the reorganization of a large 
company agree to the formation of a reorganization com- 
mittee, composed of one representative of each deposit or 
protective committee. Such a reorganization committee will 
elect its own chairman, often the representative of the com- 
mittee whose securities seem to hold the commanding position 
in respect of the proposed reorganization. It will also select 
counsel and a secretary and proceed to work out a plan. The 
representative of each deposit or protective committee will 
keep his own committee advised of the progress of the reor- 
ganization committee and will present to the reorganization 
committee the point of view of his committee and the argu- 
ments on behalf of the securities represented by his committee. 
This is by far the most effective method of working out a 
plan for the reorganization of a complicated corporate 
situation. The selection by each deposit or protective com- 
mittee of its representative on the reorganization committee 
is a matter of prime importance, as that representative’s abil- 
ity as a negotiator probably will have a direct bearing on the 
treatment of their securities in the reorganization. 


Adoption of plan.—Upon expiration of the period pre- 
scribed by its deposit agreement, after submission of its plan, 
provided the dissents or withdrawals do not indicate a re- 
jection of the plan by the security-holders, the committee 


208 WORK OF CORPORATE TRUST DEPARTMENTS 


will declare the plan operative, or, if submitted through a 
reorganization committee, will declare it approved and 
adopted. 


Assessments.—In many reorganizations it is necessary to 
raise cash either to improve the physical properties of the 
company or to increase its working capital. In the case of 
a company in process of reorganization, it is usually difficult, 
if not economically impossible, to secure new cash through 
public sale of new securities. In practically all such situations 
there is one class of securities holding a position so strong 
that, without question, the proceeds, even of forced liquida- 
tion, would pay their claims in full. There is usually, also, 
a class of securities whose equity in the situation is dependent 
upon the “going concern’ value of the business, and as to 
which it is apparent that a forced liquidation would practically 
destroy their value. Any plan of reorganization of such a 
company is, therefore, intended primarily to protect the equi- 
ties of these junior securities. If new capital is required, 
and if, as is likely, it is not possible to sell new securities on 
an economical basis without seriously weakening the position 
of the senior securities, it is proper and usual for the reorgani- 
zation plan to provide that the holders of the junior securities, 
as a condition precedent to participating in the proposed 
reorganization, must pay a cash assessment, which, when it 
has been equitably distributed among the various issues 
of junior securities, will produce the required new capital. 
Ordinarily the subscribing security-holders will be given for 
the new cash a security which in the reorganized company 
would seem to have an assured position, and, upon payment 
of the assessment, also will be given in exchange for their 
old security, a junior security, perhaps common stock, to an 
amount which fairly represents the ‘“‘going concern’’ equity 
of their old security. 

The basis of any such assessment is fully set forth in the 
plan of reorganization and forms a part thereof. It is, of 
course, not possible to have assurance that all of the security- 
holders will pay the proposed assessment. Consequently, the 
reorganization committee will arrange with bankers to under- 
write the assessment for a commission. At times, where the 
equity of the assessed stockholders is very weak, it is neces- 


REORGANIZATIONS 209 


sary, in order to secure public underwriting, for the plan of 
reorganization to place upon the holders of the securities 
next in rank the burden of an intermediate underwriting. 

In many reorganizations there is a “‘twilight zone” between 
the securities of assured position on forced liquidation, and 
the securities entirely dependent upon the ‘‘going concern’”’ 
value of the business. The intermediate security holders usu- 
ally will be offered, without assessment, junior securities in 
the reorganized company. 


Consummation of reorganization.—A plan of reorganiza- 
tion is almost invariably consummated through the foreclosure 
of the lien of one or more of the mortgages on the property 
of the company, or through the enforcement of creditors’ 
claims. At the foreclosure or bankruptcy sale, the reorgani- 
zation committee will buy in the assets of the reorganized 
company, and offer in payment (1) the deposited securities, 
to the extent of their pro-rata share in the net proceeds of 
the sale, and (2) cash for the balance.’ If the position of the 
securities which it represents is strong enough, the committee 
will borrow the funds required to make the requisite cash pay- 
ment. In many cases this is not possible and, consequently, 
the reorganization committee will need to arrange with the 
bankers underwriting the plan to advance the necessary cash. 

While, as stated, the deposited securities usually are used 
by the committee in making payment on account of its pur- 
chase of the properties of the reorganized company, the 
securities, as a rule, are not physically presented to the officer 
of the court making the sale. The committee will obtain from 
the depositary a statement of the securities on deposit, which 
it will present in lieu of the actual securities. Promptly upon 
the acceptance of its bid it will direct the depositary to hold 
the securities for the account of the court officer conducting 
the sale. Probably, as previously indicated, the depositary will 
already have been directed by the committee to hold the secur- 
ities, under its indemnity agreement with the trustee, and 
perhaps also as security for loans contracted by the committee 
for current expenses or advances on account of interest. The 
depositary, of course, must not disregard these pledges, but 


3 Paul D. Cravath, “The Reorganization of Corporations,” in “Some Legal 
Phases of Corporate Financing, Reorganization, and Regulation,” p. 181 et seq. 


210 WORK OF CORPORATE TRUST DEPARTMENTS 


should request the committee, just prior to the sale, to ar- 
range proper releases. ‘The trustee, at this point, ordinarily 
will be willing to release its lien and look to the proceeds of 
the sale of the mortgaged property for its expenses and 
compensation, and the committee, if it has outstanding loans, 
will secure from the underwriters sufficient cash to liquidate 
such obligations. While the committee is necessarily inter- 
ested in the release of these prior liens, the depositary, until 
the actual release, is responsible to the holders of the liens, 
and should for its own protection see that full releases are 
secured. 

Unless, as seldom happens, the proceeds are sufficient to 
pay the securities in full the special master, or other officer 
of the court conducting the sale, will direct the depositary 
to place on the securities, for his account, an appropriate 
endorsement evidencing the payment on account out of the 
proceeds of the sale, and then to return the securities to the 
committee. 

The cash proceeds of the sale, applicable to the undeposited 
securities, will be held by the court, or paid to the trustee 
for account of the court, to be disbursed to the holders of the 
undeposited securities, upon presentation thereof for proper 
endorsement. 

In the meantime, the committee will have caused a new 
corporation to be organized to carry on the reorganized 
business, and will sell to it, in exchange for its securities (to 
be delivered in accordance with the adopted plan of reorgani- 
zation) all of the properties of the old company acquired at 
the sale. 


Distribution of new securities.— The reorganization com- 
mittee will now transmit the securities of the new company to 
its depositary with instructions to it to deliver such securities 
in accordance with the plan of reorganization, as adopted, to 
the depositing security-holders, upon surrender of the outstand- 
ing certificates of deposit, and upon payment of the assess- 
ments, if any, imposed by the plan. The depositary will can- 
cel its certificates of deposit as surrendered in exchange for 
the new securities, and, on instructions of the reorganization 
committee, will credit the account of the new company with 
assessments as received. 


REORGANIZATIONS 211 


If assessments are imposed by the plan, a time limit will 
be prescribed, within which the security-holders must make 
payment if they desire to exercise their option. Upon expira- 
tion of this period the depositary will certify to the committee 
and the underwriters* the amount and details of the assess- 
ments paid. The committee will then call upon the under- 
writers to make payment of the balance, and direct the de- 
positary, upon receipt of the proper payment, to deliver to 
the underwriters proportionate amounts of the securities of 
the new company. 


General.—In the discussion of the consummation of a reor- 
ganization we have, for the sake of simplicity and brevity, 
referred to “depositary” in the singular. As mentioned in 
the preceding chapter (page 190) there is usually a separate 
deposit committee for each class of security of a company in 
process of reorganization. Each deposit committee names 
its own depositary. As a depositary is purely an agent, there 
is no reason why one trust company should not act as deposi- 
tary for two or more classes of security; but in practice this 
is seldom done. Consequently, it must be understood that 
there are normally a number of depositaries, each acting for 
a committee representing one class of securities, and that, 
when a plan of reorganization has been promulgated, each 
committee will direct its own depositary in such of the 
steps discussed above as affect the securities which it represents. 

Also, for the sake of brevity, we have referred to “plan 
of reorganization” and not the more usual modern term of 
“plan and agreement of reorganization.”’ The average se- 
curity-holder finds it dificult readily to comprehend complex 
legal documents. For this reason, the practice has grown of 
separating the plan and the agreement. The plan is a 
statement setting forth as briefly and as simply as possible, 
the terms of the proposed reorganization and referring specif- 
ically to the agreement, which is the contract between the 
parties at interest, and, consequently, forms the actual basis 
of the reorganization. 


Termination of depositaries’ duties—Once a reorganiza- 
tion is completed, the various committees which brought it 


4 See page 208, as to the underwriting of a reorganization plan, 


212 WORK OF CORPORATE TRUST DEPARTMENTS 


about will naturally pass out of existence, and in later years 
it may be difficult or impossible for the depositary to get 
instructions from a member who might speak, even infor- 
mally, on behalf of the committee. It is, therefore, a very 
wise precaution for the depositary to request of a committee, 
at or prior to its last meeting, instructions covering, so far as 
possible, the final disposition of all securities or documents 
relating to the reorganization, which are in the possession of 
the depositary or may be received by it later. 

A committee in passing such a resolution will usually cover 
the following points: 

1. Direct its secretary to deliver to the depositary, for 
custody, the minutes and important records of the committee. 

2. Arrange for the final disposition of the deposited securi- 
ties, perhaps through delivery to the new company, or crema- 
tion by the depositary after the elapse of a specified number 
of years. 

3. Authorize the cremation by the depositary of its can- 
celed certificates of deposit after a specified period of years. 

This is a matter of considerable importance to a trust com- 
pany acting as depositary. If this procedure, or its equiva- 
lent, is not followed, the trust company in the course of years 
will find itself burdened with the custody of a mass of securi- 
ties of little or no value, but with no one authorized to direct 
it in disposing of them. 


CHAPTER XVI 


CORPORATE READJUSTMENTS, CAPITAL SUB- 
SCRIPTIONS, AND REORGANIZATION 
DEPARTMENT RECORDS 


‘ 


Readjustments.—A readjustment is the “voluntary” rear- 
rangement of the capital structure of a corporation, although 
many corporate readjustments, while voluntary in form, are 
carried out purely to avoid a reorganization. 

There are two important differences between a readjust- 
ment and a reorganization: (1) a readjustment does not 
necessitate the enforcement of the legal remedies of security- 
holders or creditors, consequently, there is no foreclosure 
sale and the business after readjustment is carried on by the 
original corporation; (2) all classes of security-holders in a 
readjustment ordinarily are represented by one committee. 
The obvious reason for the first distinction is that the read- 
justment plan is presented before the happening of a default 
which could be the basis of remedial action by the security- 
holders. As to the second, it has been explained, in the discus- 
sion of reorganizations, that it is not considered proper for 
one committee to represent more than one class of security- 
holders. In negotiating a basis, of reorganization , there 
are, in the very nature of the transaction, conflicts of 
interest between the holders of the different classes of securi- 
ties. In the usual form of readjustment, as contrasted with 
a reorganization, the plan is worked out by the corporation, 
its bankers, or the readjustment committee itself, before the 
matter is submitted to the security-holders. Consequently, 
the deposit of securities under such a readjustment plan con- 
stitutes the committee the agent of the security-holders, not to 
negotiate the terms of a plan, but merely physically to carry 
out a stated plan, the terms of which are approved by the 
security-holders by the act of depositing their securities. 

It is not intended by the above statements to convey the 
impression that substantially all readjustments are undertaken 


213 


214 WORK OF CORPORATE TRUST DEPARTMENTS 


merely to escape an involuntary reorganization. It is obvious 
that many times such a situation may be the immediate reason, 
and, when it is possible to secure the necessary codperation 
of security-holders and creditors, a voluntary readjustment 
rather than a reorganization will benefit creditors, stockhold- 
ers, and perhaps other security-holders through the saving in 
expense, and the avoidance of the long delays inherent in 
foreclosure. On the other hand, many corporations, in the 
course of their progress, find that their capital structure has 
taken such shape as to be a handicap, and, although in no 
immediate financial difficulty, such corporations will sometimes 
“take time by the forelock” and offer a plan for readjustment 
before the handicap of their capital situation has become 
serious enough to threaten reorganization. 

From the standpoint of trust company practice, the cor- 
porate readjustment, though simpler, presents little funda- 
mental difference from a reorganization. As _ previously 
stated, the plan of readjustment is presented at the outset, 
either by the corporation, by its bankers, or by a committee 
organized for the purpose. ‘The security-holders, and, if 
necessary, the creditors, are invited to deposit their securities 
and claims, against which the depositary will issue its certifi- 
cates of deposit. When the readjustment committee, the cor- 
-poration or its bankers, as the case may be, decide that a 
sufficient percentage of each class of securities or claims has 
been deposited, the plan will be declared operative and the 
new securities will be issued by the corporation as provided in 
the plan. The depositary, will then proceed to deliver the 
new securities to the participants in the readjustment, upon 
surrender and cancellation of its outstanding certificates of 
deposit. It should be noted that, as there have been no 
foreclosure proceedings and as the original corporation carries 
on the business after readjustment, there is no way of forcing 
into the plan all security-holders and creditors. As a conse- 
quence, minority holders frequently insist upon maintain- 
ing their original position. Such situations often con- 
tinue for years after a readjustment; but gradually work out, 
through the purchase of such holdings, their maturity or 
redemption, the enhancement of value of the new securities 
if the readjustment is successful, or through involuntary reor- 
ganization, if the company, despite the readjustment, finally 


READJUSTMENTS, SUBSCRIPTIONS, RECORDS 215 


“goes on the financial rocks.’’ Another point to be remem- 
bered is that a corporate readjustment does not necessarily 
affect all classes of outstanding securities. On the contrary, in 
most cases, only junior bondholders, stockholders, and possi- 
bly the general creditors are involved. 


Capital subscriptions—A corporation extending to its 
stockholders the right to subscribe to new or additional securi- 
ties usually issues “‘rights’’ or subscription warrants evidenc- 
ing the right of each stockholder to subscribe to the new 
security on the specified terms. ‘hese warrants are then trans- 
mitted to the stockholders by the corporation or its transfer 
agent. To insure complete subscription it is usual for the 
corporation to arrange with bankers to underwrite, for a 
commission, such part of the new issue as may not be taken 
by the stockholders. The “rights” or subscription warrants 
are usually registered in the names of the company’s stock- 
holders of record on a given date and specifically state: 
(a) the class of security to which subscription may be made; 
(b) the amount of such security to which the stockholder is 
authorized to subscribe; (c) the place, rate, and method of 
payment of the subscription, if exercised; and (d) a date on 
or before which the right to subscribe must be exercised or 
the subscription warrant will become void. 

Ordinarily subscription warrants will contain, on the re- 
verse side, two forms: (1) a subscription form to be executed 
by the owner when exercising the right of subscription; and 
(2) a form of assignment so that the stockholder who does 
not desire further to increase his investment in the company 
may assign and sell his “‘rights” in the market. (The market 
price of rights varies with each issue but often is substantial.) 
A typical subscription warrant appears on page 216 (Fig. 11). 

The functions of a trust company as subscription agent, 
upon receipt from the corporation of appropriate evidence 
of the terms of the subscription and of its appointment as 
subscription agent, are (a) to accept subscriptions as pre- 
sented in accordance with the terms thereof (often the stock- 
holder is given the option of paying fully or in installments) ; 
(b) to issue to subscribers part or full paid subscription re- 


1 Where records of stockholders are kept on stencils the stencils are used 
to print the stockholders’ names and addresses on the face of the warrants. 


216 WORK OF CORPORATE TRUST DEPARTMENTS 


ceipts—or ‘‘purchase certificates” (Fig. 12, page 218) ; (c) to 
credit or remit the proceeds of subscriptions to the corporation; 
(d) at the close of the period during which subscriptions must 
be made to certify to the corporation the details of subscrip- 
tions received; (¢) to receive the subscription of the under- 
writers to the balance of the issue; and (f) upon receipt of 
the new securities issued by the corporation, to make delivery 
thereof upon surrender of the outstanding full-paid purchase 
certificates or subscription receipts. It sometimes has the 
further duty of transferring warrants (and subscription re- 
ceipts, if transferable) either to a new owner or into other 
denominations in the name of the original stockholder. These. 
transfer services might be assigned to the transfer depart- 
ment, but frequently it is more convenient for the reorgani- 
zation department to take charge of them.’ 


Fig. 11.—Subscription Warrant. 
VOID AFTER OCTOBER 22, 1925 
Subscription Warrant for Shares of Stock. 


No. 
Right to subscribe for shares 
being at the rate of one share for each 
ten shares outstanding September 21, 
1925. 
THE DETROIT COMPANY 
110 Broadway, New York, N. Y., October 1, 1925 
This is to 
certify or assigns, is entitled to subscribe on 
that 


October 22, 1925, at the rate of $100 per share, for shares of the stock 
of ‘THE DETROIT COMPANY, to be issued in accordance with and on the terms 
and conditions set forth in the circular, dated September 9, 1925, issued by the 
Board of Directors to the stockholders of the Company and on the terms and 
conditions hereinafter set forth: 
Payment of such subscription must be made, either in full on October 22, 
1925, or in the following specified installments, to wit: 
On October 22, 1925, 25 per cent; 
On December 22, 1925, 25 per cent; 
On March = 22, 1926, 25 per cent; 
On June 22, 1926, 25 per cent. 


All payments must be made either at the office of National Trust Com- 
pany, 200 Wall Street, New York, N. Y., or at the office of Border Trust 


2'The question of Federal transfer tax on transfers of warrants should be 
kept in mind, also state taxes, if applicable. 


READJUSTMENTS, SUBSCRIPTIONS, RECORDS 217 


Company, Detroit, Michigan, and must be in funds current in the city where 
such payments are made and free from collection charges. 

To those paying in full on October 22, 1925, there will be issued on or 
about October 27, 1925, the stock certificates to which they are entitled. 

To those electing to pay in installments, there will be issued transferable 
purchase certificates, acknowledging receipt of first payment, and these cer- 
tificates must be returned at the times fixed for the second, third, and fourth 
payments, accompanied in each case by the prescribed payment. The certifi- 
cates of stock covered by the purchase certificates will be delivered on or 
about June 22, 1926, upon surrender of such purchase certificates on that date, 
and interest to June 21, 1926, at the rate of six per cent per annum, will then 
be paid upon the installments previously paid. Holders of purchase certificates 
desiring to make advance payment of any installment may do so only on 
December 22, 1925, or March 22, 1926. 

This warrant will be void and of no value, unless surrendered on October 
22, 1925, either to National Trust Company at its office No. 200 Wall Street, 
New York City, or to Border Trust Company at its office in Detroit, Michigan, 
accompanied by payment of the subscription in full, or by payment of the first 
installment thereof. Failure to pay the second, third, or fourth installment, 
when and as payable, shall operate as a forfeiture of all rights in respect to 
the subscription and the installments previously paid thereon. 

This warrant is transferable or divisible by assignment and may be so 
transferred or divided at the offices of the Company, No. 110 Broadway, New 
York, N. Y., or No. 2000 Tenth Avenue, Detroit, Michigan. On the back of 
this warrant are two forms. The first to be signed when subscription is 
made, and the second, which is an assignment requiring a witness, to be signed 
if the subscription privilege covered hereby is transferred or divided. 


Assistant Treasurer 


NOTE.—The signature to this assignment must correspond with the name 
as written upon the face of this Warrant in every particular, 
without alteration or enlargement, or any change whatever. 


SUBSCRIPTION 
192— 
To The Detroit Company: 
The undersigned hereby subscribes for the shares of stock covered 
by this Warrant. 
(Signature) 


(Address) 


ASSIGNMENT 
192— 
To The Detroit Company: 
For VALUE RECEIVED, the right to make the within subscription is 
hereby assigned to 
whose address is 
(Signature) 
Witness: 
NOTE—For estates or trusts this assignment must be executed by all the 
executors, administrators, or trustees. Signatures not known to the 
company or its agents must be guaranteed. 


218 WORK OF CORPORATE TRUST DEPARTMENTS 


Fig. 12.—Purchase Certificate. 
No. BP —— PURCHASE CERTIFICATE —— Shares 
For Shares of Stock of 
THE DETROIT COMPANY 


Tus CERTIFIES that under the terms of subscription warrants issued 
by the Detroit Company, dated October 1, 1925, has subscribed at par for 
shares, of the par value of $100 each, of the stock of The»Detroit Company, 
and has paid the first installment of 25 per cent, namely, $ , on account of 
said subscription, and that the said subscriber, or his assigns, on payment, in 
funds current in New York City and free from collection charges, of the 
several further installments of the subscription price, as specified in said 
subscription warrants, to wit, 


On December 22, 1925, 25 per cent; 
On March 22;/ 19265 25) per cent; 
On June 4a; 1926,'25 per cent: 


and on surrender of this certificate at the office of National Trust Company, 
Agent of the Company, No. 200 Wall Street, New York City, will be entitled 
on or about June 22, 1926, to receive shares of stock of The Detroit 
Company, and also to receive interest at the rate of six per cent per annum 
on all installments previously paid, from the date of each payment to June 21, 
1926. 

Holders of purchase certificates desiring to make advance payment of any 
installment may do so only on December 22, 1925, or March 22, 1926. 

This certificate must be returned at the times fixed for the second and 
third payments, so that receipt hereof may be endorsed hereon, and must be 
surrendered on June 22, 1926, when the last payment is due. 

Failure to pay any installment on said subscription, when and as payable, 
shall operate as a forfeiture of all rights under this certificate, and in respect 
to the stock subscribed for as well as any installments previously paid. 

This certificate is transferable by assignment, and may be so transferred on 
books kept for that purpose at the said office of National Trust Company, 
Agent of the Company. 

In WITNESS WHEREOF, THE DETROIT COMPANY has caused this certificate to 
be signed in its behalf by National Trust Company as its Agent, this 22d 
day of October, 1925. 


THE DETROIT COMPANY 
By National Trust Company, Agent 
By 
Assistant Secretary 


Second installment has been paid on ‘Third installment has been paid on 


this certificate as required this certificate as required 
‘THE DETROIT COMPANY THE Detroir CoMPANY 
By National Trust Company, Agent By National Trust Company, Agent 
By By 
Assistant Secretary Assistant Secretary 


While the above is a typical example of a capital subscrip- 
tion transaction from the point of view of a trust company, 
as subscription agent, there may be many variations. It is 


READJUSTMENTS, SUBSCRIPTIONS, RECORDS 219 


important for the trust company to see that its instructions 
are complete and explicit, that it has been duly authorized to 
perform its duties as subscription agent, and that the right 
of subscription has been properly authorized on behalf of its 
principal—the issuing corporation. All papers necessary to 
evidence these facts, properly certified, together with speci- 
men warrants, subscription receipts, copies of circular letters, 
and so forth, should be filed with the trust company and 
approved by its counsel before it proceeds with its duties as 
subscription agent. 


Subscriptions to securities do not necessarily involve the 
issuance of “rights.’’ A bank or trust company is frequently 
requested to act as subscription agent on behalf of a corpora- 
tion offering securities to other than its stockholders. ‘The 
procedure in such cases is for the corporation to furnish the 
subscription agent with a certified list of the subscribers and 
the terms upon which subscriptions are to be received. ‘The 
agent then accepts payment from the subscribers, issues re- 
ceipts, and otherwise proceeds substantially as heretofore out- 
lined. Where subscription warrants are not issued, or do not 
contain full instructions, it will be found of much practical 
_ assistance if the trust company will request the issuing corpo- 
ration to enclose to its subscribers a printed form on which 
the subscriber is required to indicate to the subscription agent 
full instructions as to the issue and method of delivery of 
the new securities. A form of this kind may well cover such 
of the following points as may be pertinent to the transaction 
in question: (1) the full name, including the Christian or 
given name, in which the new securities are to be issued, 
(2) the full address of such person; (3) the amount remitted, 
and, if partial payments are permitted, whether such remit- 
tance is intended to be full payment; (4) a separate state- 
ment of any amount remitted to cover stock transfer taxes, 
if any such taxes are imposed, payment of which is not as- 
sumed by the issuing company (in nearly all cases any original 
issue tax which may be due is assumed by the issuing com- 
pany)*®; and (5) complete instructions as to the method of 
delivery or shipment of the new securities. 


3 See footnote, page 240. 


220 WORK OF CORPORATE TRUST DEPARTMENTS 


Reorganization department records.—While the various 
reorganization and readjustment plans may differ widely as 
to details, the services performed by the reorganization de- 
partment are more or less the same in each case. Hence, it 
is possible to standardize the departmental records. ‘Those 
illustrated in this chapter are in use by the institution whose 
corporate trust system has been described in other chapters.* 
The security and cash tickets, vault control and general rec- 
ords conform to the corporate trust department system as 


described in Chapter IV (page 34). 


THIS RECEIPT MUST BE RETURNED FILLED IN AND 
SIGNED IN INK BEFORE STOCK WILL GE DELIVERED 


No. 2277S No 22778 New York. (et suis fe eee g 


Received fom! BANKERS TRUST COMPANY \ 
EB & 


Certificate for shares of Prefered stock 
Sas RT EATER UN a wet Common 


CREEP RS PANY Acamn ETAL rule 1a J NOS A Rome MLR AN Ged eel CE 


REORGANIZATION 
DEPARTMENT STOCK WILL NOT BE READY FOR 
DELIVERY UNTIL 1-30 P. 


THE OWNER OR eee RS OF SECURITIES REPRESENTED BY THIS RECEIPT AGREE 
BANKERS TRUST COMPANY THAT SU boa poker ts RITIES MAY GE DELIVERED 
TO THE SERHER' HEREOF WITHOUT IDENTIFICA 


Borat 38, rT ae Counter Ticket. 


Upon receiving securities over its counter, the reorgani- 
zation department issues a “counter ticket’? in Form 38. 
The right-hand portion is handed to the depositor, to be 
presented at the department the following day as a receipt 
and surrendered against delivery to the depositor of the cor- 
responding certificate of deposit. ‘The left portion or stub 
of the ticket is attached to the deposited securities as a means 
of identification pending entry of the deposit on the records 
of the department. 


Upon issuance of the certificate of deposit, the ticket stub 
is attached to it, to identify the item upon delivery the fol- 
lowing day. Form 39 is a “temporary receipt’’ used if the 
department is not prepared to issue its formal receipt. Such 
a situation often arises, on the surrender of securities for 
deposit, prior to the filing with the depositary of an executed 
counterpart of a contemplated protective agreement. 


4 Bankers Trust Company, New York. 


221 


READJUSTMENTS, SUBSCRIPTIONS, RECORDS 


*yd1s990y Ale1Odus [—'6e WIO0 WY 


——— 


i 


j 


“MOLLVOIALLNZ OI! INOHLIM JOSUIW URUVAG BHL OL GIVBAIIEG BG AVW SIILINNDAS HONS LAVHL ANYAIWOD 
asnas SUAUNWA SHL HLIA B2UOV 2diZ5au SIHL AG GZLNIGEUdIY SAILIUNDIS AO SUINMO HO YANMO SHL 


a ty myoe 


“ANVdNOS LSNYl S¥SxNNVa 


“NOILYNINVX2 OL 193rEns 


Sons OSAII 354 


‘MUOA MBN 


idiZD3u AMVHOdWAL CETTT 6N 


“NOILVSIdIANEG! LNOWLIM JOIN GauvaG 2HA OL OBUBZAINZG BEG AVA SZILINNDAS HONS AVHL ANVANOD 
ASNUYL SUSUNVE BMA HAIMA 2AOV Ldi3DBU SIML AG GBLNESAUCBY SBILIUNDAS 4O BUEINMO HO MENMO FHL 


— SwuvWaYy 


NI NI Sel NOG BSVItd 


ge Sa ae Le ee a a eae 


ssayuaay - 


I wOLISOdag 40 32NVN 


-_—_ 


S3UVHS 


EEE 
ANNONY uos aanssi : SuszGWnNn 


*GSMOTI0S SV LISOd3d 40 Salvolaius9 ANWdNOD LSNYL SYSYNVa Woud QSAIZ924Y 


CeTTtT oN 


; 
i 
i 


| 


i 


222 WORK OF CORPORATE TRUST DEPARTMENTS 


Form 40 is the “reorganization record,” in which entries 
are made from the actual securities as they are deposited. 
It forms a chronological record of deposits. ‘The columns 
from left to right are used to indicate: (1) the date of 
deposit; (2) the deposit number (the primary purpose of 
these numbers is to supply a vault index, so that it will be a 


Form 40.—Reorganization Record. 


simple matter, when necessary, to withdraw from the vault the 
identical securities deposited by a given depositor); (3) the 
name and address of the depositor; (4 and 5) the number 
of shares or principal amount of bonds or notes, as the case 
may be, deposited; (6) the serial number of the certificate 
of deposit issued against the deposited securities; (7) the 


NAME OF COMPANY 


DATE AMT. BOND 


NSN s_—_—O°0Rp—OOOOOOOOOOOooooOoooooDO Oe 


Form 41.—Record of Depositors. 


READJUSTMENTS, SUBSCRIPTIONS, RECORDS 223 


initial of the bookkeeper posting the entry to the record 
of depositors, next described; and (8) any other supplemen- 
tary information which may be desirable. In addition to 
the chronological record of deposits, it is necessary that there 
be an alphabetical “record of depositors’? which is kept in a 
card index file (Form 41) posted from the reorganization 
record. Form 42 is a “vault marker.” In the case of each 
déposit one of these cards is filled out, showing (1) the 
deposit or file number; (2) the name of the depositor; and 
(3) the amount of the securities deposited. ‘This card is 
fastened firmly to the face of the securities before they are 
filed in the vault and acts as a vault index. 


REORGANIZATION DEPARTMENT 


Bilee NO oy 
DEPOSITOR 


Form 42.—Vault Marker. 


Form 43 is the record used in delivery of the new securities 
on consummation of a reorganization. ‘The left-hand page 
is a record of the securities surrendered (ordinarily the cer- 
tificates of deposit of the depositary), while the right-hand 


é 


224 WORK OF CORPORATE TRUST DEPARTMENTS 


page records the new securities delivered in exchange, in 
accordance with the plan of reorganization. In the case of 
bonds or notes deliverable under such a plan, the total re- 
quired amount of such securities is usually delivered to the 
depositary before it commences to exchange its outstanding 


Title of Securities Received 


wa 


Form 43.—Delivery Record (Left). 


Form 43.—Delivery Record (Right). 


certificates of deposit. With stock, however, the situation is 
somewhat different, and the usual procedure is for the new 
corporation to issue shares, up to a stated number, upon 

requisition of the depositary. Form 44 is the requisition to — 


a 


TRANSFER AGENT 


NEW YORK CITY 


GENTLEMEN :— 
PLEASE ISSUE AND DELIVER TO US CERTIFICATES FOR___________ STOCK 


AS FOLLOWS: 


Form 44.—Requisition for Stock. 


225 


RECORDS 


, SUBSCRIPTIONS, 


READJUSTMENTS 


*‘prosey ‘uondiosqng—/p w0 4 


SasVHS SuaaWNN eo 
BWYN S.y38IHoSENS 


OG3SYSON3HYNS SLINVYEYNVM NOILdIyOSENs 


"YOAFUYSHL GINSSI SLMIZOIU ATAVILOOAN-NON GNV 776! “I€ AVIN JNOAAT YO NO AUVHS Ud “68 LV ANVdIOD LSNUL SYUFANVE AG GSAAIZOAY SNOILLdIMOSaNs 4O GuOosY 


erusojtye>) ‘oosinued 4 ue¢g 


HOOLS Wlldv> Gayyx3ss3ud 
*Auedwiod ydei8ajoy pue auoydaya | ——— 9 | 


INAWLYVdad ~NOLLVZINVDYOSY ANVdNOD HdVeSS13L GNV SNOHdaTSL 


| 226 WORK OF CORPORATE TRUST DEPARTMENTS 


the transfer agent for use in such cases. Form 45 is similar 
in principle to Form 38, except that it is used on delivery of 
a variety of securities upon completion of a reorganization. 
Form 46 is used in furnishing lists of depositors to the 


THIS RECEIPT MUST BE RETURNED FILLED IN AND 
SIGNED IN INK BEFORE SECURITIES WILL BE DELIVERED 


Noses No._207 New ‘Youkcnu' ig 
Received from FB 4 SRER, $ atk UST oy We Sad Depositarp 
10 Year 7% Bonds Carrping Int. from Feb. 1,1925 


NORTHERN CORP. 


eounaceagrn 


—-Part Paid Subscription Receipts, 
Shares of COMMON Stock, 


Shs. Dep. Receipt Pfa. 


Shs. ; i 
EDEN ORRIDE et Options to Purchase Additional Securities 


OF 
THE NORTHERN =" COMPANY 
REORGANIZATION 
DEPARTMENT 


Ad. Int. Receipt Pfd. 


AAA ALDADPSADEISTOCWIRDS 


—_—Ad. Int. Receipt Com. 


Left by 
THE OWNER OR OWNERS OF SECURITIES REPRESENTED BY THIS RECEIPT 
4 AGREE WITH THE BANKERS TRUST COMPANY THAT SUCH SECURITIES MAY SE 
DELIVERED TO THE BEARER HEREOF WITHOUT IDENTIFICATION. 


Form 45.—Reorganization Counter Ticket. 


committee or others authorized to receive them. Form 47 
(p. 225) illustrates the record used in connection with the 
subscription to stock or other securities as described in the 
paragraphs relating to capital subscriptions. “This sheet may 


BANKERS TRUST CoO. (EET CR PP rositOns O87 aE 
DEPOSITARY 


DEPOSITOR ADDRESS eng : 


Form 46.—List of Depositors. 


be handwritten or typewritten in two or more copies, the 
original forming the departmental record and the duplicates 
being used as reports to the issuing corporation, its transfer 
agent, or elsewhere as required. 


CHAPTER XVII 
STOCK TRANSFER DEPARTMENT 


Stock transfer department.—As previously stated, the 
stock transfer department of a bank or trust company acts as 
agent for corporations and others (e. g., voting trustees) in 
issuing certificates representing shares of the capital stock 
of such corporations, or a participating interest therein, and 
in recording changes in the ownership of the stock, or par- 
ticipating interest, on books which it keeps for its principal. 
In some corporations the entire capital stock is of one kind 
or class; other corporations issue two or more classes of stock, 
the more familiar classifications being common and preferred. 
The ownership of stock is evidenced by: certificates registered 
in the owner’s name. (See pp. 228-232). 

It will be noted that, in the forms of stock certificates given 
below, the common stock certificate is stated to be of no par 
value, whereas the preferred stock certificate expresses a par 
value of $100 per share. The practice of issuing no par value 
stock has increased materially in recent years and there are 
now numerous issues of common and some issues of preferred 
stock of no par value. However, preferred stock of no par 
value must express an amount in dollars to indicate the extent, 
if any, to which the holders of the preferred stock would be 
entitled to participate in-a distribution of assets of the cor- 
poration before any distribution could be made to common 
stockholders. Currént practice, to some extent, is varying 
the older classifications of common and preferred with such 
designations as “A” and “B.” In any case the senior class 
of stock, whether designated as preferred or “A,” has certain 
rights or preferences which distinguish it from the junior class 
or classes. The preference may be as to dividends only, or it 
may include the right to participate in liquidation prior to the 
holders of junior securities. ‘These features are mentioned in 
passing, as it is intended in this chapter to discuss, chiefly, 
the mechanics of the transfer of ownership in stock. 


1 For a discussion of the classes of stock, see Arthur S. Dewing, “Financial 
Policy of Corporations” (Volume I). 


227 


WORK OF CORPORATE TRUST DEPARTMENTS 


228 


le 
ere 
[aS 
er eae 
-— Ow, 
ce 
Dore Nie 
aaa 
o ed : 
eae : 
Lasers 
eek) : 
Se 
as : 
co : 
eo 
ee 
SNe eee 
wa oes 
os : 
~ H 

a ad 

S27 
S) 

0 |0 
6 | 6 
S=—s 
fear t 
9 | 9 
s=|-s 
ae 
a 
GEA 
t1 
s}yiug) suoy 


Ass’t Secretary 


*hivjasagy 


eoeooeeeeteoeoerese eee eee ee eres see eee eee s es 


‘Uaplsastgd IItY 


eeecveveveeeeeceeeeotereereee ere ee eevee eeoe eee ee sty} 


SIgdyjO paziioyjne A[Np s}I Jo sainjeusis ay} pue uoteiodi0oD ay} Fo [BIg JY], SSANLIMA 


‘IBIJsIday ay} Aq paiojsisaI pue Juasy Jajsuesy, sy} Aq pausis 
-19}UNOD [UN PI[BA jOU SI 9}BdYIIIID sty, ‘suorstAoid pres ay} [[e Aq punNog sI pue 0} SjUasse 
‘ayeoyIg199 sity} Suydav0e Aq ‘Joaray Iapl[oy ay} pue 9}¥d41}I19D SIy} JO aSIaAII JY} UO JUIWIA}EIG 
dy} Ul [[NF UL YIIOF Jas are UOoTJVIOdIOD ay} FO YOO}G UOWWOD ay} puke YI0}G patiIajaig IsIIY 
94} 0} Suryorye AjaAtjoadsaI suolje}WI] JO suorjoI4}s91 pue ‘sadatArid ‘saouaiazaid ‘szYSII ayy, 
‘pasiopua Ajiadoid a}eoyI3199 siy} Jo Japuarins uodn ‘Aaus0}3e paziioyjne A[np Aq Jo uosiad ur 
a[qeiajsues} “ajqessasse-uou pue pied [nf ‘NOILYYOdUOD AOLO| AO NOOLS IVLIdVD NOWWOD AHL 
JO ANIVA AV AO IWNIWON LOOHLIMA Soteys “iirc rest tet et estes eeeeeeeee* yo JoUMO ay} SI 


eooereoeeree eee ees ewes eee so 


eoecoeveveeeee eee ee eeeee eee ee ee eee esse evseeese yey} XALLYAO OL SI SIH I, 


NVOIHOI ‘LIOULAG AO ALID FHL 
YO HYOX MIN AO ALIQ AHL NI UAHLIQ AIAVAIASNVAT, SI ALVOMILAID SIH], 


ANIVA UVd YO IVNINON LOOHLIAA 
SAYVHS (000'009 HOOLS NOWWOD GaZIMOHLAY 


NVOIHOIA, JO ALVLG AHL 4O SMVT AHL YAGN() CAILVAOdUYOONT 


saieyg ¢'tt sees Jaquinyy 
NOILVaOdaxOD AO.LOW 


soreys OOF UeyL 
8S9’J IO} a3edYIID 


saieyg OO ue y, 
SSoT 10F dJBOYTIID 


*(quoIg) 9}e9Y1R199 Y0IS UoUIMIOQ—ET °317 


AIIYSD ID JUDISISSP 


eeceeeen reese seer ee soos eeeeee kg 


Pf 


* 


4DA4S1B a 


WYOX MIN JO UNVG IVNOLLVN IHL 


eervaeeveneoeve eee ere eee e eae ee eee ee ee 6 poeraisisay 


STOCK TRANSFER 229 


Fig. 13—Common Stock Certificate (Back). 


STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES, AND 
RESTRICTIONS OR LIMITATIONS, RESPECTIVELY, ATTACHING 
TO THE EIGHT PER CENT CUMULATIVE FIRST PREFERRED 
STOCK AND THE COMMON STOCK OF THE MOTOR CORPORA- 
TION. 


A. The Preferred Stock shall be entitled to receive out of surplus profits 
dividends cumulative from the quarterly dividend date next preceding the day 
of issue, or from the day of issue if it be a quarterly dividend day, at the rate 
of eight per cent (8%) per annum and no more, payable quarterly on the 
fifteenth day, to stockholders of record on the Hirst day, of each of the months 
of February, May, August and November, in each year, before any dividends 
shall be paid on the Common Stock, which Common Stock, subject to the con- 
ditions hereinafter set forth, shall be entitled to receive all net income, profits 
or surplus distributed as dividends in excess of the said cumulative dividends 
of eight per cent (8%) per annum, payable on the Preferred Stock. 

B. On any voluntary distribution of capital assets, the Preferred Stock shall 
be entitled to receive an amount equal to 115 per cent of the par value thereof, 
and any unpaid dividends accumulated thereon, and no more; and on any 
other distribution of capital assets, the Preferred Stock shall be entitled to re- 
ceive an amount equal to 100 per cent of the par value and any unpaid divi- 
dends accumulated thereon, and no more. After distribution shall have been 
made to the Preferred Stock as above provided, the Common Stock of the 
Corporation shall be entitled to receive the remainder of such capital assets. 


C. The Preferred Stock shall have no preémptive right in or right to sub- 
scribe for any additional stock of whatever class which may hereafter be issued 
by the Corporation. 


D. The Preferred Stock shall be redeemed on September 1, 1949, at par; 
but the Corporation reserves the right to redeem or retire any or all of the 
Preferred Stock prior to the said date at 115 per cent of the par value thereof 
and all unpaid dividends accumulated thereon to the date fixed for such re- 
demption. If less than the whole amount of outstanding Preferred Stock be 
so redeemed at any time, the Stock to be so redeemed shall be selected by lot, 
in such manner as the Board of Directors may determine. At least thirty 
days’ notice in advance of such redemption shall be mailed to each holder of 
Preferred Stock to be redeemed, at his address registered with the Corpora- 
tion, and such other notice shall be given in the manner to be fixed by the 
By-laws; and on and after the date fixed for such redemption the said Stock 
shall cease to bear further dividends, and the respective holders thereof shall 
have no other right or interest therein, except to receive payment therefor, at 
the said redemption price, upon presentation and surrender of their respective 
certificates. 


E. Within ninety days after the termination of each fiscal period, com- 
mencing with the fiscal period ending December 31, 1920, the Corporation 
shall set aside in a Sinking Fund a sum in cash equal to at least fifteen per 
cent of the balance of its net income for such fiscal period, remaining after 
the payment of current dividends on the Preferred Stock during such period 
and all accumulated dividends, if any (but in no event less than a sum equal 
to three per cent of the largest aggregate par value of Preferred Stock at any 
time issued and outstanding), and the Corporation shall thereupon apply the 
said Sinking Fund, either to the purchase of Preferred Stock in the open 
market or at private sale, at prices not exceeding a sum equivalent to 115 
per cent and accrued dividends, or if the Corporation shall be unable to apply 


230 WORK OF CORPORATE TRUST DEPARTMENTS 


all the moneys in the Sinking Fund to the purchase of Preferred Stock prior 
to July 1 in any year, then it shall apply the moneys so remaining to the 
redemption as above provided, on August 15 next succeeding, of so much of 
the Preferred Stock as the said moneys shall be sufficient to retire at the said 
redemption prices. All the Preferred Stock so purchased or redeemed shall 
forthwith be canceled, and the total authorized amount of Preferred Stock of 
the Corporation shall be reduced accordingly. 


F, The Corporation will at all times maintain the aggregate amount of its 
net current assets and the net current assets of its constituent companies at an 
amount at least equal to 125 per cent of the par value of the outstanding Pre- 
ferred Stock, and it will at all times maintain the aggregate amount of its net 
tangible assets and the net tangible assets of its constituent companies at an 
amount equal to at least 250 per cent. of the par value of the outstanding 

Preferred Stock. 

G. Except as otherwise expressly provided by law, the Preferred Stock 
shall have no right to vote for the election of directors so long as the Corpora- 
tion shall not be in default as hereinafter provided. In case, however, and 
whenever, the Corporation shall be in default in maintaining net current assets 
or net tangible assets at the respective amounts hereinbefore stipulated, and 
any such default shall continue for the period of six successive months, or if the 
Corporation shall be in default for the period of sixty days in the payment 
of any quarterly dividend or in setting aside any required Sinking Fund in- 
stallment, the Preferred Stock shall thereafter have equal voting rights with 
the Common Stock (on the basis of one vote for every ten dollars par value 
of Stock) for any and all purposes, including the election of directors; and 
such rights shall continue in the Preferred and Common Stocks, respectively, 
until all matters in respect of which the Corporation was in default shall have 
been made good and all accumulated dividends have been paid in full, at 
which time the right to vote shall again vest in the Common Stock exclusively; 
provided, that if, at any time, the Corporation shall be in default in the pay- 
ment of any five consecutive quarterly dividends, thereupon the right to vote 
for the election of directors shall pass to the Preferred Stock to the complete 
exclusion of Common Stock, and such right shall continue in the Preferred 
Stock, exclusively, until all accumulated dividends shall have been paid in full, 
at which time the said right shall again vest in the Common Stock exclusively; 
provided, that the Board of Directors elected by the holders of Preferred Stock 
shall not have the power to retire or redeem Preferred Stock except through 
the operation of the Sinking Fund. 


H. The Corporation shall not execute any mortgage upon any of its fixed 
assets, or cause or suffer any lien in the nature of a mortgage to be placed 
thereon (except to secure the purchase price of property by a purchase money 
mortgage of not exceeding seventy-five per cent. of the fair value thereof) 
except with the prior consent in writing of seventy-five per cent. in amount of 
the outstanding Preferred Stock; and the Corporation shall not, either directly 
or indirectly, make, issue or negotiate any issues of secured or unsecured bonds, 
notes, debentures or other funded obligations by their terms payable more than 
one year from the date of issuance thereof, or become or be an accommodation 
endorser, guarantor or surety on any notes, bills, bonds, debentures or other 
obligations for the payment of money except those of a constituent company, 
if the holders of twenty-five per cent. or more of the oustanding Preferred 
Stock shall object thereto. 


I. The Corporation shall not cause, suffer or permit any constituent com- 
pany to make, issue or negotiate any issue of bonds, notes, debentures or other 
funded obligations by their terms payable more than one year from the date 


STOCK TRANSFER 231 


of issuance thereof, or to execute or place any mortgage, or lien in the nature 
of a mortgage, upon any of the fixed assets of such constituent company, ex- 
cept to secure the purchase price of property by a purchase money mortgage 
of not exceeding seventy-five per cent of the fair value thereof. 

J. In each fiscal period, the Corporation shall cause its books and accounts 
and the books and accounts of its constituent companies, to be audited by a 
certified public accountant of recognized standing; and if, in any fiscal period, 
the Corporation shall fail to cause such audit to be made, then, upon the written 
request of twenty-five per cent. or more of the outstanding Preferred Stock, 
the Corporation shall permit such audit to be made by certified public ac- 
countants designated in such request. 

K. No class of stock shall hereafter be created ranking prior to or on a 
parity with the Preferred Stock in the payment of dividends or the distribu- 
tion of capital assets. The par value of Preferred Stock issued and out- 
standing shall at no time exceed two-thirds of the Corporation’s actual cap- 
ital paid in. 

L. No Preferred Stock, other than the initial issue of $2,500,000 par value, 
shall at any time be issued unless the average net income of the Corporation 
for the period of twenty-four months ending not more than sixty days next 
preceding the issuance thereof shall have been at least equal to two times the 
aggregate annual dividend requirements of the Preferred Stock outstanding 
and that proposed to be issued; nor shall the Corporation in any event issue 
any additional Preferred Stock if the Corporation shall be in default in the 
payment of any quarterly Preferred Stock dividend or in setting aside any 
Sinking Fund installment, or if, by the issuance of such additional Preferred 
Stock, the respective ratios borne to the Preferred Stock then outstanding, in- 
cluding that proposed to be issued, by the net current assets or the net tangible 
assets of the Corporation and its constituent companies shall be reduced below 
the percentages hereinbefore specified. In the computation of the average 
annual net income for the purpose of this Article L there shall be included 
the average annual net income for the same period of any property or plant 
to be acquired with such additional Preferred Stock or with the proceeds of the 
sale thereof, and also the amount of the annual interest charge for the same 
period on loans to be discharged by the sale of such additional Preferred 
Stock; and in the computation of net current assets and net tangible assets for 
the purpose of this Article L there shall be included the proceeds of the sale 
of such additional Preferred Stock of the net current assets and the net tangible 
assets respectively to be acquired with such proceeds. 

For the definition of the terms herein employed, reference is hereby made to 
the Articles of Association of the Corporation, as amended, a duly certified 
copy of which is on file with the Transfer Agent. 


WORK OF CORPORATE TRUST DEPARTMENTS 


232 


Spit rs Sats 
oe Ee i} 
cast Ri Seah 
AS Ne 
A SG 
aes & 
ag Te 
a ate 
ro, Sewase 
le Se a 
ee 
oad : 
- A; : 
oe . 
a) : 
ee) : 
ee | > 
pee) . 
A tS . 
~~ : 
See 
Sil ate 
eae 
ee 
| Ss 
A ee 
O 


0 |0 
sos 
ae 
poss 
9 |9 
ies 
+ | + 
eae 
Coe 
Pode 


s}iuqQ) sua, 


ot 4IANSDIAT 1.S5SP 


eovooveovreeoeeoeeooeeeeee eee eee eee ee eee Hee ee 


juapisatg aig 


2.8 8.6 66 6) 6 O66 Om wD Ore Oa SC BELO LS 6 eae Ree 6 6 8 Oe ge eS 


Sys ce 
Aep ccccrscstcscssssessesess sruz ‘sraoqyo paziioyjyne A[np sj Jo sainjeusIs ay} SSHNLIAA 


‘1vI}SISIY 94} pue JUSsSY Jajsuery, 94} Aq paudisrajuNOD [HUN PI[BA OU SI 9}VdYHII SIyy, 


‘uamAed 10 pUdPIAIp Jay}0 OU O} Jnq prleduN Uay} spuapIAIp aAr}e] 
-nuind yons Fo JUNOWe ay} pue anjea ied sz Jo yuauAed 0} szasse Jo UOTNQII}sIp UO pue AjIvIs 
winjuad iad uaAas JO a}e1 ay} Je SPUAPIAIP sATR[NUIND 0} ‘YD0}g UOWWIOD ay} 0} adUaI1aF0I1d UI 
papuue st ‘uonerodioouy Fo a3¥voyI319D 9Yy} UI paprIAoid A][N} alow se ‘YD0}g Patiafarg ay, 


‘9}BOYT}199 SIy} JO Japuarins uo Aaui0Wy Aq 10 ‘uosiad ur Japjoy ay} Aq AueduioD ay} 
jo syooq ay} uo AjuO a[qeiajsueI} ‘ANVdWOD) NOILONGOAG NVOWAINY 40 AOOLS GAWAATAAd 94} FO 
soreys 3[qessosse-uou pue pred [[0F Oo .0 8-2 08 8 9 0 6..0 © '@:.@ 6.0.6.0 8 ©. 850-9. @ C_—e 0°68) 60/62 0-6, 2 0-2 2-2 8 jo IdJuUMO 3q} St 


IVH J, SAIMILUID SIL 
sareyg ¢t¢t*" veeees Jaquinn 


Agsuaf MAN JO ALVLS FHL 40 SMV] AHL YAAN() GILVYOdYOONT 
HOV OOT$ SAUVHS 


000'000‘++$ TVL1dvV) 000'000‘r+r$ 
HDOLS NOWWOD aqaZMoHLay MOOLS AIwAIATAT 


ANVdWOO NOILLONGOUd NVOIYANV 


soreys OT UBY YT, soreys OOT UBT, 
SS9'J OJ 9389413190) 88a] OJ 9}VOYHIAD 


‘aqOYTIED YOoIg Pesayolg—bl “31 


491YSDD 1 SSP 


Coeeceresr eer eee seers esrersereene Aq 


G) 
° 
z 
S 
ES 
o 
> 
tar 
td 
o 
~ 
a 
oO: 
Za 
> 
lag) 
w& 

a> 

Q 2 

Pie 

ban 

>) 

a 

a 


Asem hee a Ams aa kep Matra CTT pasaisidoy 


STOCK TRANSFER 233 


Signatures on stock certificates— As a rule, stock certifi- 
cates are signed by two officers of the issuing corporation 
under its corporate seal. A corporation whose stocks are 
active generally delivers a supply of stock certificates, signed 
in blank, to its transfer agent, which issues and countersigns 
them from time to time as required. Thereafter the certifi- 
cates are also signed by a registrar, whose duties will be dis- 
cussed in the next chapter. Let us first examine into the prin- 
cipal duties of the transfer agent. 


Appointment of transfer agent for corporation; docu- 
ments to be received.—There should be in the files of the 
transfer agent proper evidence of: (1) authorization of 
the issue of all outstanding shares (or, in the case of a newly 
organized corporation, the shares presently to be issued) ; 
(2) authority of designated officers to sign stock certificates 
on behalf of the corporation and to instruct the transfer agent 
in connection with its duties; (3) formal appointment of the 
transfer agent. 


The evidence required, as enumerated in the preceding 
paragraph, is substantially as follows: 


1. A copy of the corporation’s charter or articles of in- 
corporation (with amendments to date) certified by the sec- 
retary of state of the state in which the corporation is organ- 
ized. ‘Chis document will evidence the creation of the cor- 
poration and also the due authorization of the capital stock 
of such corporation. 


2. A copy of the corporation’s by-laws certified by its 
secretary or assistant secretary under its corporate seal. The 
by-laws lay down rules under which the corporation may 
act. Frequently the by-laws of a corporation are quite gen- 
eral in their terms, providing, for example, that the duties 
and authority of its officers shall be such as may be delegated 
by the board of directors. In such a case the transfer agent 
will also require certified copies of the resolution or resolu- 
tions of the board of directors granting authority to the 
officers of the corporation in respect to the issuance of 
stock. 


234 WORK OF CORPORATE TRUST DEPARTMENTS 


Form 48.—Resolution Appointing Transfer Agent. 


Transfer Agent—(Stock Outstanding) 


CERTIFIED COPY OF RESOLUTIONS 
of the 
BOARD OF DIRECTORS 
of 


On motion duly seconded, it was 


RESOLVED: 


First: That Bankers Trust Company, of New York, N. Y., be and it is 
hereby appointed agent of this company, with the title “Transfer Agent,” for 
the transfer of certificates 


for the capital stock of this Company, of which there are now 
outstanding shares of said preferred stock and shares of said com- 
mon stock. 


SECOND: That for the purpose of an additional original issue of the cer- 
tificates representing the stock, the Transfer Agent is hereby directed: 

(1) To record and countersign as Transfer Agent certificates in such names, 
and for not exceeding 


shares of such stock, of the par value ot $ each 
— shares of such stock, of the par value of $ each 
shares of such stock, of the par value of $ each 


when signed by* the President or a Vice-President and the Treasurer or 
Secretary or an Assistant Treasurer or an Assistant Secretary of this Com- 
pany, and in such amounts, as this Company may direct in a writing, signed 
by the and/or under the seal of this Company, and 


(2) To deliver the certificates to the Registrar of this Company, for regis- 
tration and countersignature and to deliver the certificates when so counter- 
signed to, or upon the written order of, the _of this Company; 


TuirD: That the Transfer Agent be and it is hereby authorized and di- 
rected to make transfers from time to time upon the books of this Company 
of such certificates for such capital stock, and of the certificates for — shares 
of the preferred and — shares of the common stock of this company now out- 
standing as may be surrendered for transfer, properly endorsed and duly 
stamped as may be required by the laws of f , of New York, and of the 
United States, and signed by the proper officers of this Company, as provided 
in paragraph Second of these resolutions, and, as to certificates issued by said 
Transfer Agent, countersigned by the Transfer Agent and the Registrar, and to 
record and countersign new certificates accordingly when they shall have 
been signed by the proper officers of this Company, as provided in paragraph 
Second of these resolutions, and to deliver the certificates to the Registrar for 
countersignature, as provided in paragraph Second and when so countersigned 
to deliver them to or upon the order of the person entitled thereto. 


* These resolutions should correspond to the provisions of the charter or certificate of 
incorporation, and by-laws. 
{ Here insert State of incorporation, if stamps are required by the laws of that State. 


STOCK TRANSFER 235 


FourTH: That specimen signatures of the officers of this Company author- 
ized to sign certificates of stock as aforesaid, and of the officers of the 
Registrar authorized to sign for the Registrar, and specimen stock 
certificates, be lodged forthwith with the Transfer Agent to be used by it for 
purposes of comparison; and that the Transfer Agent shall be protected and 
held harmless in recognizing and acting upon any signature or certificate be- 
lieved in good faith to be genuine. When any officer of this Company or of 
the Registrar shall no longer be vested with authority to sign for this 
Company or for the Registrar, as the case may be, written notice thereof 
shall immediately be given to the Transfer Agent and until receipt of such no- 
tice the Transfer Agent shall be fully protected and held harmless in recogniz- 
ing and acting upon certificates bearing the signature of such officer or a 
signature believed by it in good faith to be such genuine signature. 


FirTH: That from time to time additional officers may be appointed by 
resolutions of the Board of Directors of this Company not inconsistent with 
its by-laws, to sign certificates of stock on behalf of this Company, and in 
like manner additional officers may be appointed to sign on behalf of the 
Registrar, and in every such case certified copies of the resolutions effect- 
ing the appointments and specimen signatures of such officers shall forthwith 
be lodged with the Transfer Agent. 


S1ixTH: That when the Transfer Agent deems it expedient, it may apply to 
, City of State of , counsel for this Company, or to its own 
counsel for instructions or advice, and for any action in accordance with such 
instructions or advice this Company will fully protect and hold it harmless 
from any and all liability. 


SEVENTH: In the event that any such certificate shall become lost or destroyed 
before any new certificate or certificates shall be issued in lieu thereof, a satis- 
factory bond shall be required in such amount as may be provided by the by- 
laws of this Company, and in any event not less than the value of such cer- 
tificate, wherein the Transfer Agent shall be named as one of the obligees. The 
bond shall be in a form satisfactory to the Transfer Agent. 


EIGHTH: That the President and the Secretary of this Company 
be and they hereby are directed to certify a copy of these resolutions under 
the seal of this Company and to lodge the copy, together with certified specimen 
certificates of the stock of this Company in the forms duly adopted by it, 
certified copies of the charter or certificate of incorporation and all amend- 
ments thereto (properly certified by the Secretary of State) and of the by-laws 
of the Company, with the Transfer Agent, and to furnish to the Transfer 
Agent certified copies of any amendments that may from time to time be made 
to the charter or certificate of incorporation or by-laws. 


We, the undersigned, President and Secretary, do hereby certify 
that the foregoing is a true and complete copy of resolutions duly adopted at 
a meeting of the Board of Directors of the (hereinafter called “Com- 
pany”), duly called and held at No. in the City of , State of , on 
the day of , 19—, a quorum being present. 

We further certify that the annexed certificates are true and correct speci- 
mens of the certificates of the capital stock of the Company which have been 
duly adopted by the Company, and the annexed schedule or signature card or 
cards, set forth the officers of the Company and of , Registrar, authorized 
to sign such certificates, and that the signatures set opposite their respective 
names are specimens of the genuine signatures of such officers. 


236 WORK OF CORPORATE TRUST DEPARTMENTS 


We further certify that the Company was duly organized under the laws 
of and that under the accompanying charter or certificate of incorporation 
and all amendments thereto, certified by the Secretary of the State, the Com- 
pany has an authorized capital stock of $ subdivided into 


shares of the par value of each of stock, 

shares of the par value of each of stock, 

shares of the par value of each of stock, 
WITNEss our hands and the seal of the Company this day of , 19—. 
President 
(Corporate Seal) Secretary 


Form 48A.—Resolution Appointing Transfer Agent 
(With Co-transfer Agent). 


Co-Transfer Agent. 


CERTIFIED COPY OF RESOLUTIONS 
of the 
BOARD OF DIRECTORS 
of 


On motion duly seconded, it was 
RESOLVED: 


First: That of } , of , and Bankers Trust Company, of 
New York, N. Y., be and they are hereby appointed agents of this Company, 
each with the title of Transfer Agent for the transfer of certificates 


for the aoe capital stock of this Company 
een 


SECOND: That for the purpose of the original issue of said stock, said Trans- 
fer Agents are hereby directed 


(1) To record and countersign as Transfer Agent certificates in such names, 
and for not exceeding 


shares of stock 
shares of stock 
shares of stock 


of the par value of each, when signed by* the President or a Vice-Presi- 
dent and the Treasurer or Secretary or an Assistant Secretary of this Company, 
in such amounts, as this Company may direct in writing, signed by the 
and/or under the seal of this Company; and 


(2) To deliver said certificates to the Registrar in the same City, as the 
Transfer Agent so countersigning, viz:— 


in ; or in New York, for registration and countersig- 
nature and to deliver said certificates when so countersigned to, or upon the 
written order of, the of this Company; 


_ ™These resolutions should correspond to the provisions of the charter or certificate of 
incorporation, and by-laws. 


STOCK TRANSFER 237 


PROVIDED, HOWEVER, that the stock to be originally issued by each Transfer 
Agent be limited as follows: 


—— shares of such stock,t 
—— —— shares of such —— stock, 
— shares of such —— stock, 
—— shares of such —— stock, 
—— { —— shares of such —— stock, 
—— shares of such —— stock, 
—— shares of such —— stock, 
Bankers Trust Company { —— shares of such —— stock, 
—— shares of such —— stock, 


TuirD: That said Transfer Agents or either of them be and they are hereby 
authorized and directed to make transfers from time to time upon the books of 
the Company of such certificates of such capital stock as may be surrendered 
for transfer, properly endorsed and duly stamped as may be required by the 
laws of + , of New York, and of the United States, and signed by the 
proper officers of the Company, as provided in Paragraph Second of these 
resolutions, and countersigned by any Transfer Agent and any Registrar, and 
to record and countersign new certificates accordingly when the same shall 
have been signed by the proper officers of the Company, as provided in Para- 
graph Second of these resolutions, and to deliver said certificates to the proper 
Registrar for countersignature, as provided in said Paragraph Second, and 
when so countersigned to deliver the same to or upon the order of the person 
entitled thereto. 


FourTH: It is the intention and purpose of these resolutions that certificates 
of the stock of this Company shall be interchangeably transferable in the cities 
of ‘ , and New York, N. Y. The fact of the recording and counter- 
signature of new certificates, whether by way of original issue or upon a 
transfer, shall be advised immediately by mail by the Transfer Agent counter- 
signing the same to the other Transfer Agents; and each Transfer Agent shall 
be fully protected and held harmless by this Company by reason of its failure 
or refusal to transfer any certificates countersigned by another Transfer Agent 
when it shall not have received such notice of the issue or countersignature of 
such certificates. 


FIFTH: That specimen signatures of the officers of this Company authorized 
to sign certificates of stock as aforesaid, and of the officers of the respective 
Transfer Agents and Registrars authorized to sign for said respective Transfer 
Agents and Registrars, and specimen stock certificates, be lodged forthwith 
with each of said Transfer Agents to be used by them and each of them for 
purposes of comparison; and that said Transfer Agents and each of them shall 
be protected and held harmless in recognizing and acting upon any signature 
or certificate believed in good faith to be genuine. When any officer of the 
Company or of any Transfer Agent or Registrar shall no longer be vested 
with authority to sign for the Company, or for such Transfer Agent or Regis- 
trar, as the case may be, written notice thereof shall immediately be given 
to each Transfer Agent and until receipt of such notice said Transfer Agents 
shall be fully protected and held harmless in recognizing and acting upon 
certificates bearing the signature of such officer or a signature believed by 
them or any of them to be such genuine signature. 


+ The sum of these amounts should equal the amount authorized under (1). Where 
possible, confine original issue to one Transfer Agent. _ 
t Here insert state of incorporation, if stamps are required by the laws of that State. 


238 WORK OF CORPORATE TRUST DEPARTMENTS 


SIxTH: That from time to time additional officers may be appointed by 
resolutions of the Board of Directors of this Company not inconsistent with 
its by-laws, to sign certificates of stock on behalf of this Company, and in 
like manner additional officers may be appointed to sign on behalf of the 
respective Transfer Agents and Registrars, and in every such case certified 
copies of the resolutions effecting such appointments and specimen signatures of 
such officers shall forthwith be lodged with the Transfer Agents. 


SEVENTH: In the event that any such certificate shall become lost or destroyed 
before any new certificate or certificates shall be issued in lieu thereof, a satis- 
factory bond shall be required in such amount as may be provided by the by- 
laws of this Company, and in any event not less than the value of such cer- 
tificate, wherein the Transfer Agent shall be named as one of the obligees. ‘The 
bond shall be in a form satisfactory to the Transfer Agent. 


EIGHTH: That when any of said Transfer Agents deems it expedient, it may 
apply to of City of , State of , counsel for this Company or to 
its own counsel, for instructions or advice, and for any action in accordance 
with such instructions or advice this Company will fully protect and hold it 
harmless from any and all liability. None of said Transfer Agents shall be 
in any manner liable for any act or omission of any other Transfer Agent. 


NINTH: That the President and the Secretary of the Company 
be and they hereby are directed to certify a copy of these resolutions under 
the seal of this Company and to lodge the same, together with certified specimen 
certificates of the stock of this Company in the forms duly adopted by it, 
certified copies of the charter or certificate of incorporation and all amend- 
ments thereto (properly certified by the Secretary of State) and of the by-laws 
of the Company, with each of said Transfer Agents, and to furnish to 
each of said Transfer Agents such certified copies of any amendments that may 
from time to time be made to such charter or certificate of incorporation or 
by-laws. 


We, the undersigned, President and Secretary, do hereby certify 
that the foregoing is a true and complete copy of resolutions duly adopted at 
a meeting of the Board of Directors of said Company, duly called and held 
at No. in the City of , State of , on the day of , 19—, 
a quorum being present. 

We further certify that the annexed certificates are true and correct speci- 
mens of the certificates of the capital stock of said Company which have been 
duly adopted by said Company. We further certify that the annexed schedule 
or signature card or cards, set forth the officers of said Company and of ; 
and , Transfer Agents and ; ; and , Registrars, authorized 
to sign such certificates, and that the signatures set opposite their respective 
names are specimens of the genuine signatures of such officers. 

We further certify that said Company was duly organized under the laws 
of and that under the accompanying certificate of incorporation and all 
amendments thereto, certified by the Secretary of the State, the Company 
_has an authorized capital stock of $ subdivided into shares of 
the par value of each of stock, shares of the par value of 
each of stock, and shares of the par value of each of 


stock. 


WITNESS our hands and the seal of the Company this 


day of , 19—. 
President 


(Corporate Seal) Secretary 


STOCK TRANSFER 239 


3. A copy, certified by the proper officers of the company, 
under seal, of the resolutions of the board of directors,’ ap- 
pointing the transfer agent and outlining its authority. The 
forms of such resolution, as adopted by a trust company in 
New York, for standard use, are given below. 


While the form largely explains itself, it is perhaps well to 
emphasize the desirability of naming attorneys to whom the 
transfer agent is directed to look for all necessary legal ad- 
vice, and the statement that the transfer agent shall be under 
no liability when acting upon the advice of such attorneys. 
The transferring of stock is a highly technical matter and 
legal questions will continually arise. Therefore, it is a wise 
precaution for the transfer agent at the time of its appoint- 
ment to require explicit instructions as to the attorneys upon 
whose advice it is authorized to rely. 


4. A certificate by the secretary or assistant secretary, 
under the corporate seal, of the due election or appointment 
of all officers of the corporation, authorized to take any 
action in respect of the issue or transfer of its stock. 


5. Specimen signatures of all the officers, covered by the 
certificate referred to in item 4. 


All documents received in support of an appointment 
should be submitted to counsel for approval on behalf of the 
transfer agent. 


Original issues of stock.—In the case of a new corporation, 
one of the first duties of a transfer agent will concern the 
issuance and delivery of certificates representing stock to the 
amount authorized by the charter or such part thereof as the 
corporation may direct the transfer agent to issue. From 
time to time the corporation may, through amendment to 
its charter, increase (or reduce) the amount of its author- 
ized stock, in which case appropriate evidence should be 
filed with the transfer agent and submitted to its counsel 
for approval before action thereunder is taken by the transfer 
agent. 


2Under some circumstances the transfer agent might require evidence of 
appropriate action by the corporation’s stockholders. 


240 WORK OF CORPORATE TRUST DEPARTMENTS 


At the present time (1926) every original issue of stock 
is subject to the Federal stamp tax, under the Federal Reve- 
nue Act of 1926. The transfer agent must keep currently 
informed as to the laws imposing such taxes and the regula- 
tions thereunder issued by the Federal authorities.’ 

When the transfer agent is acting in connection with stock 
listed on the New York Exchange (and other stock exchanges 
have similar requirements), it must report to the Committee 
on Stock List of the Exchange any original issues of stock, 
so that the Committee, if its requirements have been met, 
may notify the registrar of the issue.* In the absence of such 
notification the registrar, under its agreement with the Stock 
Exchange, will be obliged to withhold registration of the 
certificates. 


In some cases the original issue of stock may require the ap- 
proval of a governmental body such as the Interstate Com- 
merce Commission (as to railroad stocks) or one of the vari- 
ous state commissions. Evidence of the approval of any such 
body having jurisdiction of the original issue of stock should 
be filed with the transfer agent. 


Voting trust certificates.—In acting as transfer agent for 
voting trust certificates the duties and responsibilities of the 
agent are the same, generally, as in the transfer of stock. The 
transfer agent is appointed by its principal, the voting trustees, 
not by the corporation. ‘The authority of the voting trustees 


3 Federal stamp tax. The following is a quotation from the Federal Revenue 
Act of 1926, Section 807, Schedule A, Part 2; which imposes the existing tax on 
original issues of shares of stock: “Capital stock, issued: On each original 
issue, whether on organization or reorganization, of certificates of stock, or of 
profits, or of interest in property or accumulations, by any corporation, on each 
$100 of face value or fraction thereof, 5 cents: Provided, That where a certifi- 
cate is issued without face value, the tax shall be 5 cents per share, unless 
the actual value is in excess of $100 per share, in which case the tax shall be 
5 cents on each $100 of actual value or fraction thereof, or unless the actual 
value is less than $100 per share, in which case the tax shall be 1 cent on each 
$20 of actual value, or fraction thereof. 

“The stamps representing the tax imposed by this subdivision shall be at- 
tached to the stock books and not to the certificates issued.” 

Among the authoritative services on Federal and New York State transfer 
taxes, are those of Prentice-Hall, Inc., and The Corporation Trust Company. 


4 The listing requirements of the New York Stock Exchange are reprinted on 
page 441 et seq. 


STOCK TRANSFER 241 


is derived by virtue of a voting trust agreement between the 
trustees and such stockholders as may deposit their stock there- 
under and accept, in exchange, voting trust certificates. Such 
an agreement is put into effect when it is desired to concen- 
trate the voting control of a corporation in a few hands.° 

The usual arrangement is for the transfer agent (1) to re- 
ceive certificates of stock (properly assigned for transfer and 
accompanied by the necessary transfer tax stamps) from either 
the voting trustees or the stockholders; (2) to transfer this 
stock to the names of the voting trustees; and (3) to issue 
and deliver to the depositors voting trust certificates for a 
like number of shares. The stock certificates should be de- 
posited with the custody or trust department of the institution 
which acts as transfer agent, to be released only with the con- 
sent of the transfer department, which the latter will give 
only pursuant to the provisions of the agreement and upon 
surrender for cancellation of voting trust certificates repre- 
senting an equal number of shares. Dividends paid by the 
corporation on the stock held by the voting trustees are usually 
distributed, as received, to voting trust certificate holders. 

The duration of voting trusts sometimes is limited by statute 
—in New York to ten years. 


A typical voting trust certificate reads as follows: 


Fig. 15.—Voting Trust Certificate. 


CENTRAL MILLING COMPANY 
No. 


—— Shares 
Preferred Stock Voting Trust Certificates 


This certifies, that, on March 6, 1926, will be entitled to receive a 
certificate or certificates, expressed to be fully paid, for shares of one 
hundred dollars each, in the preferred stock of the Central Milling Company, 
and, in the meantime, to receive payments equal to the dividends, if any, col- 
lected by the undersigned Voting Trustees upon a like number of such shares 
standing in their names. Until the actual delivery of such stock certificates, 
the Voting Trustees shall possess, in respect to any and all such stock, and 
shall be entitled, in their discretion, to exercise, all rights and powers of 
absolute owners of said stock, including the right to vote for every purpose and 
to consent to any corporate act of said Company except as expressly limited 
in the agreement in pursuance of which this certificate is issued, it being 


5A comprehensive treatment of this subject will be found in Harry A. 
Cushing’s “Voting Trusts.” 


242 WORK OF CORPORATE TRUST DEPARTMENTS 


expressly stipulated that no voting right passes by or under this certificate, or 
by or under any agreement expressed or implied. 

This certificate is issued pursuant to, and the rights of the holder are sub- 
ject to, and limited by, the terms and conditions of a certain agreement dated 
the sixteenth day of February, 1921, between certain holders of voting trust 
certificates and of the preferred stock and the undersigned voting trustees, 
filed with said company. 

No stock certificate shall be due or deliverable hereunder before the sixteenth 
day of March, 1926, but the Voting Trustees may, in their uncontrolled dis- 
cretion, make earlier delivery thereof. 

This certificate is transferable only on the books of the Voting Trustees by 
the registered holder hereof, either in person or by attorney duly authorized, 
according to rules established for that purpose by the Voting Trustees, and on 
surrender hereof; until so transferred, the Voting Trustees may treat the 
registered holder as owner hereof for all purposes whatsoever, but they shall 
not be required to deliver stock certificates hereunder without surrender hereof. 

This certificate is not valid unless duly signed on behalf of the undersigned 
Voting Trustees by National Trust Company (their agent) and also registered 
by First Trust Company of New York, as Registrar. 


In Witness Whereof, the undersigned Voting Trustees have caused this 
certificate to be signed by National Trust Company, their duly authorized agent, 


this day of , one thousand nine hundred and 
Henry Fowler, 
Clarence Weekes, 
John Howell, 
Voting Trustees. 
By NATIONAL TRusT COMPANY. 
Their Agent. 
Registered —————__- By 
First Trust Company of New York Assistant Secretary 
Registrar 
By 


Assistant Secretary 


Transfers.— One of the most technical duties of the trans- 
fer agent is to pass upon the validity of the assignments of 
stock certificates presented for transfer. The assignment 1s 
usually made on the form provided on the back of the stock 
certificate itself,° but may be made on a separate assignment 
(“transfer power’) supplied, in standard forms, by law sta- 
tioners. Practically all forms of stock assignment contain an 
appointment of an attorney to record the transfer on the books 


6 The following is the form of stock assignment as approved by the New 
York Stock Exchange: 


STOCK TRANSFER 243 


of the corporation. It will be noted in the forms of stock 
certificates illustrated on pages 228 and 232, that stock is 
tranferable ‘fon the books of the Company, by the holder in 
person or by Attorney,” upon surrender of the certificate prop- 
erly endorsed." ‘The stockholder may, accordingly, personally 
enter a transfer of stock upon the stock records of the com- 
pany. This requirement, without alternative, would be an 
inconvenience to most stockholders and probably something 
of a nuisance to the transfer agent. As a practical matter, the 
name of the attorney to make the transfer is left blank when 
the stockholder executes an assignment, and the transfer is 
recorded by an employee of the transfer agent, acting as the 
attorney of the stockholder. ‘The name of this employee is 
inserted, in the assignment, as the attorney of the transferor. 


Power of substitution.—Should an attorney be named, 
other than the transfer agent’s employee, such attorney per- 
sonally may make the transfer. As a practical matter he 
usually executes a power of substitution,® leaving blank the 
name of the substitute so that the transfer agent may insert 
the name of its employee. 


Assignments.—The transfer agent, on behalf of its prin- 
cipal, is required to pass on the validity of each assignment. 
presented as a basis for the transfer of stock. As previously 


»% SB bas For value received hereby sell, assign and transfer unto 
is) . ° ° 
aac Pe isk shares of the *capital stock represented by the within 

B=} o ° . 2 ° 

ereces o> certificate and do hereby irrevocably constitute and appoint 

ma Per ° 
So avs 68 attorney to transfer the said stock on the books of the 

5 2 ° ° e ° ° 2 
e be SSE 5 = within named company with full power of substitution in the 
Gen wz Ee A 
Ee ta ee remises. 
7 ee guy ee 4 
sagzes%S Dated ————_————— 19—. 
orn iy a 
SS erae a ,,[n presence of 
° 

ASkenans 


*On certificates without nominal or par value the word “capital’? may be omitted. 


7 The phraseology varies, as. will be noted by a comparison of the two stock 
certificates illustrated. 


8 The following is the usual form of power of substitution: 


— hereby irrevocably constitute and appoint ————— substitute to transfer 
the within named stock under the foregoing power of attorney, with like power 
of substitution. 

Dated 
Witness: 


244 WORK OF CORPORATE TRUST DEPARTMENTS 


explained, the form of assignment is provided on the back 
of the stock certificate and if this form, or a standard de- 
tached form is used, there can be no question as to the form 
of the assignment, but this point should be carefully watched 
and any unusual form submitted to counsel for approval. 


The signature of the transferor should appear on the as- 
signment exactly as it reads on the face of the stock certi- 
ficate, and should be witnessed and bear a date subsequent to 
the date of the stock certificate. Lack of a date and witness 
would not necessarily invalidate an assignment, although both 
are desirable as evidence of the proper execution of the as- 
signment. 

The name and address of the transferee should be entered 
in the assignment after the words “transfer unto.” Most 
transfer agents insist that the Christian or given name of a 
stockholder appear on the face of the certificate and on the 
stock records, hence the transferee’s name should be entered 
as ‘‘Henry I. Jay,” or ““H. Ivan Jay,” and not as “HT jay 
In making a transfer to a married woman, her Christian name 
rather than her husband’s name should be used, thus— 
“(Mrs.) Barbara Corlis Day,” not “Mrs. Frank E. Day.” 
It is not the custom in this country to add any titles to names 
appearing on stock certificates and, except for the designation 
‘‘Miss” or “‘Mrs.,” no prefixes or suffixes are used. 


The primary question in passing upon the validity of an 
assignment is whether the signature thereto is in fact the signa- 
ture of the registered owner of the shares to be transferred. 
It is apparent that a trust company cannot be familiar with 
the signatures of the thousands of constantly changing stock- 
holders of the various corporations for which it acts as trans- 
fer agent. Consequently, some means of identification are 
required and it is important that the requirements as to identi- 
fication, while giving every reasonable protection to the trans- 
fer agent and its principal, the corporation, shall not place 
unreasonable difficulties in the way of transfer of the stock. 


Guarantee of signatures.—At present it is the general rule 
in New York City to require that the signature on assign- 
ments of stock be (1) guaranteed by a member of the New 


STOCK TRANSFER 245 


York Stock Exchange, or (2) identified by a banking institu- 
tion in New York City. Such guaranty or identification is 
usually endorsed directly below the transferor’s signature on 
the back of the certificate or on the separate assignment as 
the case may be. 

The acceptance of the guaranty of members of the New 
York Stock Exchange to the general exclusion of other brok- 
erage firms is due to the fact that the Stock Exchange holds 
its members strictly responsible for their guaranty of signa- 
tures and, also, to the high value of membership on this 
exchange which indicates a generally high financial responsi- 
bility of its members. 

The alternative requirement of identification by a banking 
institution is not always limited to New York banks, as New 
York transfer agents usually will accept the identification of 
other banking institutions of recognized standing, provided a 
specimen of the identifying signature has previously been filed 
with the transfer agent. 

The transfer agent should maintain a file of specimen signa- 
tures of brokerage houses and bank officials which are ac- 
ceptable to it. In order to keep this file up to date it is neces- 
sary for the transfer agent to be on the watch continually for 
changes in personnel of the various institutions and firms. 

Until some years ago it was the practice to accept an ac- 
knowledgment before a notary public, plus, in the case of 
notaries of other states, a county clerk’s certificate as to the 
due appointment of the notary. ‘This practice has been dis- 
continued by many transfer agents because of the feeling that 
they were entitled to the larger measures of protection af- 
forded by the identification or guaranty of an institution or 
firm of recognized financial responsibility. 

The proper identification of the signature to the assignment 
is, however, but one of many points involved in passing on a 
stock transfer. There are a number of questions which 
arise with respect to the assignor’s capacity or authority. It 
is not our purpose to enter into a discussion of the legal phases 
of stock transfers which, of themselves, are sufficient to war- 
rant a separate study.” But it may be helpful merely to draw 


9 The reader is referred to H. Brua Campbell’s “Legal Aspects of the Trans- 
fer of Securities,” and F. L. Maraspin and H. B. Driver’s “Fundamental 
Principles of Stock Transfers.” 


246 WORK OF CORPORATE TRUST DEPARTMENTS 


attention to some of the difhculties which transfer agents must 
meet. 


Classification of transfers——Transfers may be placed in 
the following general classifications: 


Individuals. 
‘Tenants. 
Partnerships. 
Corporations. 
Fiduciaries.”° 


Individuals and partnerships.—The simplest class of trans- 
fers is that of stock registered in the name of an individual 
or a partnership, where the assignment is made by the in- 
dividual stockholder or a general partner of the partnership, 
as the case may be, such transfers requiring from the transfer 
agent’s point of view, merely adequate assurance as to the 
genuineness of the signature of the transferor. A different situ- 
ation exists when the assignment is made by an attorney pur- 
suant to a power of attorney from the stockholder. In that 
case the transfer agent should carefully examine the attorney’s 
authority from his principal, which should be of recent date. 
The original power of attorney, or a copy certified in a man- 
ner acceptable to the transfer agent, should be kept on file, 
and counsel should pass upon the question of whether the 
power is sufficiently broad or explicit to authorize the attorney 
to make the transfer. 


Tenants.— he interests of two or more individuals in a 
single piece of property may be a joint tenancy or a tenancy 
in common. From the practical point of view of the transfer 
agent the chief distinction is that when a joint tenant dies his 
share in the property goes to the survivor or survivors; while, 
on the other hand, if one of the tenants in common dies, his 
interest in the property passes to his estate. In issuing a cer- 
tificate of stock to two or more persons, a transfer agent 
should insist on having the character of the tenancy expressed 
in the certificate, for example, ‘Arthur B. Cliff and Donald 
E. Field as joint tenants and not as tenants in common.” If 
a transfer agent is requested to transfer a certificate issued to 


10F, L. Maraspin and H. B. Driver’s “Fundamental Principles of Stock 
Transfers,” p. 26. Mr. Campbell uses the same classifications. 


STOCK TRANSFER 247 


tenants in common when one of the tenants has died, it should 
require an assignment by the remaining tenant or tenants and 
by the executor or administrator of the deceased, accompanied 
by papers such as we discuss under the heading of fiduciary 
transfers. On the other hand, ‘‘where a joint tenant has died, 
an endorsement by the survivors is sufficient.” The transfer 
agent should, however, receive proof of death of one of the 
joint tenants before accepting an assignment of the survivor 
or survivors. 


Corporations.— The transfer of stock registered in the 
name of a corporation raises the question of the authority of 
its ofhcers, who, by executing the assignment, have purported 
to act on its behalf. ‘The careful transfer agent will always 
require evidence of this authority. ‘The general authority of 
the officers of a corporation is set forth either in the by-laws 
of the corporation, or in the by-laws and resolutions of its 
board of directors. ‘Lhe latter is true when, as is often the 
case, the by-laws provide that the authority of the ofhcers 
shall, subject to the regulations of the board of directors, be 
such as usually pertain to the respective ofhces. Unless, how- 
ever, the authority, as stated in the by-laws or general resolu- 
tion, includes the right to execute assignments of stock on be- 
half of the corporation, a specific resolution authorizing the 
particular assignment in question should be required. As a 
consequence, in transferring stock registered in the name of a 
corporation, the transfer agent should require: 

1. Copy, certified by the secretary or an assistant secretary 
of the transferor under its corporate seal, of (a) its by-laws, 
(b) its general resolution of authority, or (c) a specific resolu- 
tion, or, perhaps, the by-laws and a resolution, as the facts 
of the case may warrant. 

2. A certificate, similarly executed, as to the election of the 
officers executing the assignment. 


Fiduciaries.—Included in this classification are executors, 
administrators, guardians, and trustees. ‘Transfers of stock 
coming under this classification are the most complicated with 
which the transfer agent deals. ‘To give an idea of the variety 


11H, Brua Campbell’s “Legal Aspects of the Transfer of Securities,” p, 25. 


248 WORK OF CORPORATE TRUST DEPARTMENTS 


of questions involved we reprint below the requirements of one 
New York transfer office with respect to transfers by execu- 
tors or administrators, of stock registered in the name of a 
decedent. ‘This applies, also, to transfers of registered bonds 
discussed in the next chapter. 


BANKERS TRUST COMPANY 


NEw YORK 


Requirements for the transfer by Executors or Administrators of stocks or bonds 
registered in the name of a decedent. 


a 
2. 


Copy of will, if any, duly certified by probate or surrogate official. 


Officially certified copy of decree of appointment of executor or administrator, 
or, if such decree is older than six months, then probate certificate of recent 
date showing such appointment to be still in force. 


Waiver and consent of the New York State Tax Commission, required by 
New York Inheritance Tax Law, which may be obtained upon application 
to the New York State Tax Commission at Albany, N. Y. 


In the case of stock, evidence of the payment of the Inheritance Tax on 
waivers and consents from state officials as to all States imposing an inherit- 
ance tax or requiring such waiver or consent in respect to the securities 
sought to be transferred. Application for such waiver and consent should 
be made to the Attorney General of such State at the State Capitol. 


In the case of a foreign decedent, a Federal waiver is required unless 
American ancillary letters have been issued. Application for it should be 
made to the Commissioner of Internal Revenue, Washington, D. C. 


Evidence of payment of Stock Transfer Taxes (Federal or State), rate of 
2 cents per $100 face value for New York State Stock Transfer Tax and at 
the rate of 2 cents per $100 face value for the Federal Stamp Tax 
(and 2 cents additional for the Pennsylvania tax in the case of stock of 
Pennsylvania corporations), unless stock is to be put into the name of the 
executor “as executor’ or administrator, “as administrator.” 


Stock certificates or bonds properly assigned by the executors or administra- 
tors, as such. Signatures to the assignment should be witnessed and should 
be guaranteed by a bank having a New York correspondent or by a New 
York stock exchange house. Names and addresses of the transferees should 
be filled in after the words “transfer unto” on the back of the certificate. 
The space preceding the word “attorney” should be left blank. 


If the transfer is to a person other than the executor or administrator, then 


(a) If the transfer is to a legatee there must be submitted an affidavit 
signed by the executor stating (1) that the laws of the State appoint- 
ing the executor have been complied with as to giving notice to 
creditors, and (2) that all claims against the estate and all adminis- 
tration expenses and prior legacies have been paid, or that there 
are other assets sufficient to pay outstanding claims and unpaid 
administration expenses and prior legacies (excepting that in some 
States a distribution may not lawfully be made within a certain 
period, and further excepting that in some States a distribution 
may be made only under order of Court). 


STOCK TRANSFER 249 


(b) If the transfer is to a person other than a legatee a certified copy 
of a court order must be furnished authorizing the sale of the stock 
or bonds unless the will expressly gives the executor power of sale, 
or unless the law of the State wherein the executor or administrator 
was appointed permits him to sell without a court order. 


9. A transfer by an executor or administrator to himself individually will be 
recognized only: 


(a) In the case of an executor—(1) if such transfer is specifically 
authorized by a court order a certified copy thereof must be fur- 
nished, or (2) if it appear from the will that he is the sole legatee, 
or a residuary legatee, or a legatee of the specific security sought to 
be transferred, or that the transfer is with the consent of all those at 
interest, but in case of “(2)” there must be furnished in addition, 
an affidavit signed by the executor stating (1) that the laws of the 
State appointing the executor have been complied with as to giving 
notice to creditors, and (2) that all legacies, claims against the 
decedent and his estate, and administration expenses have been 
paid or have been adequately provided for: 


(b) In the case of an administrator—only if such transfer is specifically 
authorized by a court order. A certified copy thereof must be fur- 
nished. 


Dated, —— 


Note. The above requirements are subject to change. 


Transfers by guardians, and testamentary trustees present 
their own peculiar difficulties, each involving, in addition to 
other transfer requirements, the production of a court ap- 
pointment of the fiduciary. Transfers by individual or cor- 
porate trustees acting under deeds of trust or other agree- 
ments usually are simpler, depending upon the terms of the 
trust instrument, which the transfer agent must always study 
before attempting to pass upon any transfer. 

In transferring stock to fiduciaries the transfer agent should 
be careful to have the character of the fiduciary relationship 
expressed on the stock certificate; for example, “National 
Trust Company and William Calvin as Executors of the last 
will and testament of Theodore Warren, deceased,” or “John 


Strong as Trustee for Percival Little under deed of trust 
dated June 6, 1925.” 


In the case of all transfers requiring documentary evidence 
in addition to the mere assignment of the securities it is good 
policy to submit all of the papers to counsel, for approval, 
betore making the transfer. 


Taxes on transfers.—Under the Federal Revenue Act of 
1926 every transfer of stock is subject to a stamp tax of 2 


250 WORK OF CORPORATE TRUST DEPARTMENTS 


cents on each $100 of par value or fraction thereof, or on 
each share without par value.” 


The State of New York and other states, including Mas- 
sachusetts and Pennsylvania, also impose stock transfer taxes. 
The transfer agent must keep currently informed on the sub- 
ject of existing laws, both Federal and State, imposing such 
taxes, and regarding the regulations and rulings of the Bureau 
of Internal Revenue and the state tax authorities.” 


12Federal stamp tax. The following is a quotation from the Federal 
Revenue Act of 1926, Section 807, Schedule A, Part 3, which imposes the 
existing tax on transfers of shares of stock: “Capital stock, sales or transfers: 
On all sales, or agreements to sell, or memoranda of sales or deliveries of, 
or transfers of legal title to shares or certificates of stock or of profits or of 
interest in property or accumulations in any corporation, or to rights to sub- 
scribe for or to receive such shares or certificates, whether made upon or 
shown by the books of the corporation, or by any assignment in blank, or by 
any delivery, or by any paper or agreement or memorandum or other evi- 
dence of transfer or sale, whether entitling the holder in any manner to the 
benefit of such stock, interest, or rights, or not, on each $100 of face value or 
fraction thereof, 2 cents, and where such shares are without par or face value, 
the tax shall be 2 cents on the transfer or sale or agreement toi sell on each 
share: Provided, That it is not intended by this title to impose a tax upon an 
agreement evidencing a deposit of certificates as collateral security for money 
loaned thereon, which certificates are not actually sold, nor upon the delivery 
or transfer for such purpose of certificates so deposited, nor upon mere loans 
of stock nor upon the return of stock so loaned: Provided further, That the 
tax shall not be imposed upon deliveries or transfers to a broker for sale nor 
upon deliveries or transfers by a broker to a customer for whom and upon 
whose order he has purchased same, but such deliveries or transfers shall be 
accompanied by a certificate setting forth the facts: Provided further, That in 
case of sale where the evidence of transfer is shown only by the books of the 
corporation the stamp shall be placed upon such books; and where the change 
of ownership is by transfer of the certificate the stamp shall be placed upon the 
certificate; and in cases of an agreement to sell or where the transfer is by 
delivery of the certificate assigned in blank there shall be made and delivered 
by the seller to the buyer a bill or memorandum of such sale, to which the 
stamp shall be affixed; and every bill or memorandum of sale, or agreement 
to sell before mentioned shall show the date thereof, the name of the seller, 
the amount of the sale, and the matter or thing to which it refers. Any person 
liable to pay the tax as herein provided, or anyone who acts in the matter 
as agent or broker for such person, who makes any such sale, or who in pur- 
suance of any such sale delivers any certificate or evidence of the sale of any 
stock, interest or right, or bill or memorandum thereof, as herein required, 
without having the proper stamps affixed thereto with intent to evade the 
foregoing provisions, shall be deemed guilty of a misdemeanor, and upon con- 
viction thereof shall pay a fine of not exceeding $1,000, or be imprisoned not 
more than six months, or both,” 

13 Among the authoritative services on Federal and New York State transfer 
taxes are those of Prentice-Hall, Inc., and The Corporation Trust Company. 


STOCK TRANSFER 251 


Estate and inheritance taxes.—Under the Federal Rev- 
enue Act of 1926 and the appurtenant regulations of the 
Bureau of Internal Revenue, and under the inheritance tax 
laws now imposed by some of the states, the transfer agent 
is required, under penalty, to prevent the transfer of stock 
from the name of a decedent in the absence of evidence in 
required form of the payment of such taxes, or a waiver from 
the proper taxing authority. The laws and regulations” re- 
lating to these taxes are constantly changing. Again, in this 
case, the transfer agent for its own protection should sub- 


scribe to a service which will keep it currently informed on 
the subject. 


Co-transfer agencies.—Many corporations maintain agencies 
for the transfer of their stock in more than one place. This 
is done for the convenience of the stockholders, to stimulate 
the market for the stock and sometimes to meet the require- 
ment of stock exchanges. The New York Stock Exchange 
and other stock exchanges require that a transfer office be 
maintained in their city for all stock which they list. ‘The 
New York Stock Exchange also requires that the certificates 
issued by transfer agents in different cities be interchangeable, 
that is, transferable at any transfer office of the company ir- 
respective of the office of issue. 


There are two distinct methods of handling co-transfer of- 
fices. One method provides that a certificate is transferable 
only at the office from which it was issued. As stated above, 
this method is not acceptable to the New York Stock Ex- 
change, and it does not offer to the stockholders the full con- 
venience of the second method. On the other hand, it is 
simpler and more economical to operate. This plan requires 
each transfer office to keep records only of the certificates is- 
sued from its office, and provides for the transfer of shares 
from one transfer office to another, at the option of stock- 
holders, but only upon surrender of the certificates represent- 
ing the shares to be transferred, to the office of issue, against 
the issuance of a transfer warrant directed to the transfer 
agent in the city to which the shares are to be transferred. 


14 Prentice-Hall, Inc., and The Corporation Trust Company issue services 
relating to the Federal Estate Tax and the various state inheritance taxes. 


252 WORK OF CORPORATE TRUST DEPARTMENTS 


The latter, upon surrender of the warrant, will issue its own 
certificates representing the stock transferred. 

The second (or interchangeable) method, which is much 
more satisfactory to the stockholder, is required by certain 
stock exchanges and is rapidly displacing the other system. 
Under the interchangeable system each stock certificate bears 
an endorsement to the effect that it may be transferred at any 
transfer office of the company. The several transfer offices 
exchange daily reports of all transfers. It is much the better 
practice for each office to maintain complete stock ledgers 
covering all of the outstanding stock of the company. Where 
this is not done, and each agent’s ledgers record only the 
stock certificates issued at its office, it is necessary to refer to 
the daily transfer reports when transferring certificates issued 
by another agent. Each transfer agent will require evidence 
of the due appointment of the other transfer agents, and evi- 
dence of the authority of the persons who will sign on behalf 
of such transfer agents, with properly verified specimen signa- 
tures. 

Some states require that all companies incorporated under 
their laws, or, perhaps, even those registered to do business 
therein, shall keep at their principal office within such state 
a complete record of stockholders. If the stock of a corpo- 
ration subject to such requirements is transferable in another 
state, the transfer agent will be required to report all trans- 
fers to the office in which a stockholders record must be kept 
to comply with the statutory requirements. 


Records.—The records required in a transfer department, 
while simple in principle, involve much detail. Forms 49, 
49-A, and 49-B illustrate counter tickets issued against the 


THIS RECEIPT MUST BE RETURNED FILLED IN AND 
SIGNED BEFGRE STOCK WILL BE DELIVERED 


A792 New York, ————__— lt 


owe Mea | DANKERS TRUST COMPANY | 


Transfer Agent 
Certificate for__t_t—__——-shares of Stock 


ber 


STOCK WILL NOT’BE READY FOR DELIVERY 
UNTIL 1.30 P. M. 


Form 49.—Counter Ticket (General). 


STOCK TRANSFER 253 


receipt of stock for transfer. The use of similar counter 
tickets has heretofore been described under reorganization 
department records (page 220). 


THIS RECKIPT MUST BE RETURNED FILLED IN AND 


Cc 7210 


SIGNED BEFORE STOCK WILL BE DELIVERED 


New Fork, ee Le 


LC BEE CANKERS .LRUST COMPANY. 
Transfer Agent 
Certificate for___—_____shares of Common Stock 
AMERICAN Tit COMPANY 


per. 


r | N STOCK WILL NOT BZ READY. FOR DELIVERY 
UNTIL 1.30 P. M, 


| COMMON 
Form 49A.—Counter Ticket (Special). 


(TIN COMMON 


No.AZ024 Now 208 | 


BANKERS TRUST. COMPANY 


16 WALL STREET 
NEW YORE 


Received from 


yamaferred 00x j TRANSFER DEPT. 


ele EH Loe etal f: Wee 
sae ee at Ea Saleen Received from 
ADDITIONAL PAPERS REQUIRED 


Certificate for_____..__shares of __.__ stock 


OR ee ser eee os te ey | ee LP Company, 


together with. certain papers tendered to effect transfer of same 
and held pending approval of .Counsel. 


- Stock delivered only on surrender of this memorandum, 


eee 
STOCE WITH PAPERS, HELD POR APPROVAL OF COUNSEL. ana 


Form 49B.—Temporary Counter Ticket. 


Transfer record.—The transfer record (Form 50) is pre- 
pared with as many copies as required. If, for example, a 
certain stock is transferable in three cities, on an _ inter- 
changeable basis, and, in addition, the principal office of the 
company required a daily report, an original and three carbon 
copies of the transfer record would have to be prepared by 
each transfer office. When more than one carbon copy is re- 
quired these sheets can best be prepared in typing machines 
adapted for this purpose. Form 50 is the actual transfer 
sheet and constitutes the transfer agent’s original record. 
Form 50-A is the daily report of transfers to one of the co- 
transfer agents, and Forms 50-B and 50-C (which are not 
illustrated, being similar to 50-A) are daily reports to the 
other co-transfer agent and the company, respectively. Form 


254 


WORK OF CORPORATE TRUST DEPARTMENTS 


"SIsJSUPL]T Jo Iodey—yos W407 


BAYN 8 BOBSs4ENYSL 


430, BON O) UDB segs) . 
‘ANVdWOD LSNUl SYAYNVSE ‘Vd ebireccee 
“ANVdWOD JUOD HOUNGSLLId 3° HOCLS NOWWOD 3° #228215H49D YSangeyWg pue erydjepepyg *y30)2 may *mojeg peyeoIpul se peojsUeD AEP S14) OALY aM ysingsjzig jo Amedme’) ysnijy Tomy ey] 


YOK MAN 


*‘plooey Iojsuely— os w10oy 


ozus0Nauuns 
SUZERNNN 
BLvoIslesD 


“HLYOY LAS NOSYSH SV “AANYOLLV GANDISHZGNN FHL Ad GSYYSISNVUL ATSYAH AMV “IDWd SIH NO GagMOSAG SALVIISILUAD AG GALNISAUdTY "ANYdWOD 3NOD HDUNGSLLId 
SHL JO ASOLS NOWWOD 3HL JO SAUVHS SH1 (OLAUFHL GAHOVLLY YO) ALVOIELLYIO HOV NOdN GSSYOGNZ YSsSNVUL OL AINYOLLV JO YSMOd GNV ITVS 4O THE AHL JO ANLYIA AG 


ANVdWOD ANOO HOUNASLLId 


BHL 40 
YIOLS NOWWODS 


MYOA MAN ee 


STOCK TRANSFER 255 


50, the original record, is signed by the attorney making the 
transfers, who, as explained earlier in this chapter, is an em- 
ployee of the transfer agent. In many cases reports to the 
company or co-transfer agents are not required; in that event, 
the carbon copies may be dispensed with and the columns 
headed for shares received for transfer but issued by other 
transfer agents may be eliminated. 

Each certificate accepted for transfer is entered on this 
record, followed by the names and addresses of the trans- 
ferees, the number of shares to be transferred to each, and the 
other data indicated by the column headings. ‘The certifi- 
cates to be transferred are then passed to clerks who prepare 
the new certificates from the assignments. The new certi- 
ficates are thereupon delivered to the clerks in charge of the 
transfer records, who check them back to entries on the rec- 
ord and enter the serial numbers of the new certificates, which 
are then ready for signature by an officer of the transfer 
agent. In trust companies where the volume of transfers is 
not too heavy, the officer in charge of the transfer department 
will require that the new certificates, when presented for signa- 
ture, be accompanied by the corresponding old certificates, 
and he personally will check the total number of shares repre- 
sented by the old and the new certificates, and, if they balance, 
will sign the new and cancel the old. In the larger transfer 
offices auditors are assigned to the department to audit the 
issuance of new certificates and the cancellation of the corre- 
sponding old certificates. “These auditors, however, should 
not be permitted to take any part in the actual work of the 
department, as an independent check on the issuance of stock 
is essential. The auditors also check the certificate numbers 
of the new certificates to see that such certificates have been 
issued in consecutive order. If any have been spoiled through 
errors in preparation it is required that they be marked “void” 
and the signatures canceled by perforation. 


Stock ledgers.—For each company whose stock is trans- 
ferred (and for each class of stock if there is more than one) 
there should be a set of stock ledgers, preferably in loose-leaf 
form (Form 51), with a separate account for each registered 
stockholder. Each account should show the name and address 
of the stockholder, dividend instructions filed by the stock- 


256 WORK OF CORPORATE TRUST DEPARTMENTS 


COLUMBIA HYDRO-ELECTRIC COMPANY COMMON STOCK 


Date 
CANCELLED 


holder, if any, the date of issue or cancellation, the serial num- 
ber and number of shares represented by each stock certificate 
issued in the name of such stockholder or transferred by him, 
and the balance of shares remaining in the account. 

Normally the transfer record referred to above is delivered 
to the bookkeepers on the morning following the date of trans- 
fer, and the bookkeepers are required to complete the posting 
to the ledgers by noon, so that any discrepancy between the 
transfer record and the stock ledger may be reported and 
verified before it is necessary to deliver the new certificates. 
The practice in New York City is to deliver new certificates at 
and after 1:30 o’clock on the next business day after the trans- 
fer is presented (Saturdays excepted). 


Stock ledger trial balances.—It is important that frequent 
trial balances be taken in the stock ledgers to be certain that 
the aggregate of the balances in the accounts reconciles with 
the total number of shares authorized to be outstanding. The 
stock ledgers constitute the record from which dividends are 
paid and stockholders’ lists for meetings and other purposes 
are prepared; consequently, the ledgers must be kept in con- 
dition to supply accurate stockholders’ lists on short notice. 
In the case of a company whose stock is active and its share- 
holders numerous,” the work of striking a trial balance is 
simplified by breaking the total figure into a number of sub- 


15 For example, the American Telephone & Telegraph Company on July 28, 
1926, reported 380,683 stockholders of record. 


STOCK TRANSFER 257 


q NAME OF COMPANY CLASS OF STOCK 
eam RMI Ting eG A ON aT a Oe 
Chih canal Rca a PT 
area ahn uaa | 801 a nA TINT TS 
LS ee PR eS TO 
eae ainitenl rani aa| oa Ls [a cor need | aM PT 
(Se ENS ee a PR 
Te a TAT 
Rees DaIne MORO aN A A Ta Ee TMNT 
CI Pe Sevipa ea 
EGS TE) Ed 
Aca eR Rone SUMAN 
teal 
CC 
Oo a HEAP i A 
i RaRETS sien KG te ig AA TCC 
Fou 2 2 0" Oe IES Dc 6 RT 
jo 
Ts 
Bere vay 
LSI TET 
ever |xwaz Jawa [evar aves de 
Fa a 
La aca BR NA 
a as 
i eegeneone | ems roma| se 
ieee 
ms Sa Eee eae AR 


Form 52.—Stock Ledger Trial Balance. 


totals corresponding to the divisions of the ledger, as illus- 
trated in Forms 52 and 53. Form 52 is the trial balance sheet 
on which the total of each ledger is entered and footed to 
prove with the total number of shares outstanding. Form 
53 is a record of changes between ledgers; it is posted from 
the transfer sheets and, if the trial as taken on Form 52 does 
not balance with the total amount of shares outstanding, the 
net change on each ledger as indicated by Form 53 is applied 
to the last previous trial balance, and so the difference is local- 
ized in one or a few of the ledgers, thus obviating the neces- 
sity of checking back all changes since the last successful trial 
balance. 


Record of original issues.—It is obvious that a transfer 
agent should keep a record of the number of shares originally 
issued and of all subsequent issues. Form 54, which may be 
kept as the first sheet of the stock ledger, is designed for this 


258 WORK OF CORPORATE TRUST DEPARTMENTS 


purpose. In the illustration used columns are provided for 
one co-transfer agent. The ‘‘Remarks’’ column is ordinarily 
used to record the date of the resolution of the corporation’s 
stockholders or directors (or both) authorizing the issue or 
the retirement of stock. 


5 
i 
O 
a 
g| 
O 


Form 53.—Record of Balance Changes between Ledgers. 


STOCK TRANSFER 259 


BANKERS TRUST CO. STATE INCORPORATED 


TRANSFER AGENT 


TITLE OF COMPANY =a CAPITAL 
_. —..... PREFERRED 


PRED AV PEY MNS EAP EIN sue COMMON 
PAR VALUE CLASS OF STOCK Lao Risen CAPITAL 


Sanaes SHARES CANCELLED 
ANDO RETIRED 
DATE AuTHOnizeD LISTED TOTAL 
N. ¥. STOCK SHARES REMARKS 
TOBE ISSUED] EXCHANGE OUTSTANDING 


Form 54.—Record of Original Issues. 


Control of unissued stock certificates.—The practice of 
placing with a transfer agent a supply of stock certificates, 
signed in blank, has already been mentioned. To give these 
certificates the protection which they should receive makes it 
necessary to place them under control, and to this end one 
trust company in New York sets aside a special safe in which 
unissued stock certificates are stored. This safe is subject to 
the regulations of the main vault, and deposits or withdraw- 
als of stock certificates are made only on the authority of 
vault tickets approved by an officer of the transfer depart- 
ment.© A limited supply of certificates is kept on hand in 
the transfer department to take care of current needs, and 
this supply is replenished by vault withdrawals daily, or as 
frequently as required. Form 55 illustrates the record used 


TITLE OF ACCOUNT 


. a OFFICER 
DELIVERED DEPOSITED | patance AND 
DEPOSITED CLERK 


a 


Form 55.—Control Paracas Certificates. 


CVRTMAGATT Nos 


DELIVERED 


for unissued stock certificates. Each such certificate, for pur- 
poses of control, is treated as one unit. The audit depart- 
ment receives, each day, all vault deposit and withdrawal 


16 For an explanation of the use of vault tickets, see pages 47 et seq. 


260 WORK OF CORPORATE TRUST DEPARTMENTS 


tickets. As the auditors assigned to the transfer department 
also examine all issues of stock to see that the certificates have 
been used in numerical order, it is possible for the audit de- 
partment to keep a continuing check on the stock certificates. 


Stockholders’ right to inspect records.—One of the most 
dificult questions a transfer agent has to face is the frequent 
request of stockholders for permission to inspect the stock 
records. In the case of a stockholder desiring information 
which he believes will assist him in protecting his position as 
a stockholder, the request is both reasonable and proper. 
Unfortunately, however, stockholders’ lists have come to have 
a commercial value and sometimes such requests are for pur- 
poses foreign to the best interests of the corporation and its 
stockholders as a whole. The laws of the various states differ 
widely on the subject and the transfer ofhcer should in all 
such situations secure the advice of counsel, and confer with 
the issuing corporation before action is taken.” 


Closing of transfer books.— Many corporations during a 
short period prior to the payment of dividends, or the hold- 
ing of a stockholders’ meeting, “‘close” their transfer books; 
that is, they refuse to make transfers of stock for a specified 
period. In some states the statutes expressly give the right 
to close transfer books. In states where this is not a statu- 
tory right, authority is usually included in the charter or by- 
laws of the company. The purpose, obviously, is to give to 
the corporation an opportunity to prepare a list of stockhold- 
ers for use at the stockholders’ meeting or in paying a divi- 
dend. The custom of closing transfer books is, however, giv- 
ing way to a considerable extent to the practice of declaring 
dividends on a specified date payable to stockholders of record 
of a second, but later specified date, but without closing the 
books. The latter practice is a convenience and sometimes a 
decided advantage to stockholders; consequently, it is gener- 
ally favored. 


Annual and special stockholders’ meetings.—The transfer 
agent will be required to prepare and certify a list of stock- 
holders for use at each stockholders’ meeting. ‘The charter 


17 In New York the right of stockholders in this respect is set forth in Section 
22 of Chapter 61 of the Laws of 1909, as amended in 1916, 


STOCK TRANSFER 261 


or by-laws of the company will specify that stockholders of 
record at the date of closing the books, or a certain number of 
days prior to any such meeting, are entitled to vote thereat. 
Whether or not the transfer books close, the list will be 
prepared as of the date so specified. 


Dividends.—In the case of a dividend declaration the trans- 
fer agent will also prepare and certify a list of stockholders of 
record on the specified date (the ‘‘record date’’ just men- 


acca aes ly pelle ————————-COMPANY 


LIST OF STOCKHOLDERS 


a Re ee mT g Rem CRT O NI MERE 
STOCKHOLDER CHECK No, SHARES AMOUNT 


Form 56.—Stockholders’ List. 


tioned) and from this list the dividend will be paid. Form 
56 is used for preparing certified stockholders’ lists; the col- 
umns headed “Check No.” and “Amount” are used only in 
connection with dividend payments. It will be noted that the 
form is ruled for use of stencils, which, in transfer work, 
where the volume is at all heavy, are almost indispensable. 
These stencils are of the type illustrated in Chapter IV, page 
63, except that each one bears the name and address of a 
stockholder. 1 iene 


Dividend orders.—In the absence of instructions to the 
contrary, dividends are paid to the registered stockholders 
as their names and addresses appear on the stock records. A 
stockholder, however, has the right to give other instructions 
as to the disposition of dividends on stock registered in his 
name. Such instructions are termed ‘‘dividend orders,” and 
most transfer offices require the use of a standard form such as 
that illustrated in Form 57. Dividend orders, as received 
must be carefully noted on the proper account.in the stock 
ledger (as indicated on Form 51, page 256), and noted on the 
stockholders’ lists prepared for dividend payments. When the 


262 WORK OF CORPORATE TRUST DEPARTMENTS 


stencil system is used, the dividend orders are noted directly 
on the stencil and so automatically appear on the dividend 
lists. If the stencil system is not used, Form 56 (page 261) 
should have an additional column, to the right, headed, ‘“Div- 
idend Instructions,” in which all such orders will be noted on 
each list prepared for use in the payment of dividends. 


Ab PERMANENT DIVIDEND ORDER 
Gransfer Agent 
16 Wall Street, New York, N.Y. 


POA 


Until this order shall be revoked in writing by the undersigned, 
please mail'checks payable to the order of F 


Please insert in spate below the numbere 
of certificates held by you and total num- INaine a fe el a ee 
ber of shares represented thereby. 

Certificate Numbers - Shares’ 


in’ payment of all dividends now due or which may hereafter be payable upon the 
Stock of the < COMPANY 


standing on the books of said Company in the name of 


(Sign Here) 1s io sea cecils a lecga caves coe ten teceetcovaeanesssaeeavsceas theca nena eee een ~ 
This signature is to be written EXACTLY as the name appears on Certificate. 
When check is to be made payable to other than the signer, signature of the latter must be acknowledged before 


a Notary Public on the back of this order, and, if signed by an Attorney, Administrator, Executor, Guardian or 
Trustee, it must be accompanied by satisfactory evidence of signer’s authority. 


Form 57.—Dividend Order (Front). 


DO NOT HAVE SIGNATURE ACKNOWLEDGED BEFORE A NOTARY PUBLIC UNLESS 
YOU WISH CHECK PAYABLE TO THE ORDER OF ANOTHER PERSON, 


PORE G OES csse Sih rats es vkas Sep ged vnks phovarcipctetee eptiannsicensreo ss 
‘ 8S.¢ 


; County hee siinanc esata ssc ael. ha secseecotne tssmsicas ee 


On (Ghisjee = ase day of. in the year 


one thousand nine hundred and : before me personally came 


Form 57.—Dividend Order (Back). 


Dividend disbursing agent.—Many corporations desire to 
be relieved entirely of the responsibility and detail involved 
in the payment of dividends, and so, by proper resolution, will 
appoint its transfer agent as dividend disbursing agent. If a 
corporation does not disburse its own dividends the transfer 
agent, having all the required records, is the logical appointee. 
Form 58 illustrates a resolution in form required by a trust 
company in New York to cover such appointments. 


STOCK TRANSFER 263 


Form 58.—Resolution Appointing Dividend Disbursing Agent. 
RESOLUTION 
of the 


BOARD OF DIRECTORS 
of 


RESOLVED that Bankers Trust Company, Transfer Agent of this Company, 
be and it hereby is appointed Dividend Disbursing Agent for the Capital 
Stoek of this Company, and it hereby is authorized and directed to pay such 
dividends as may be declared by the Board of Directors of this Company upon 
the Company’s lodging with said Bankers Trust Company certified copies of 
the resolution of the Board of Directors declaring such dividends and depositing 
with said Bankers Trust Company an amount sufficient for the payment of such 
dividends at least two days before each dividend date. 

I Heresy CertTiry that the foregoing is a true copy of a resolution adopted 
at a regularly called meeting of the Board of Directors of held at the 
office of on the day of 19—, at which meeting a quorum was 
present. 

WITNESS my hand and the seal of the Company this 


19—. 


day of 


If acting as dividend disbursing agent, the transfer agent, 
upon receipt of due notice of the declaration of a dividend 
will prepare a certified list of stockholders as of the record 
date, exactly as though it were not dividend disbursing agent. 
Such notice should state the number of the dividend, the 
class of stock upon which it is payable, the rate per share, 
the date on which it is payable, and the date as of which stock- 
holders of record are entitled to the dividend. In addition, the 
dividend disbursing agent will prepare checks, as illustrated 
by Form 59, over its signature as agent for the company. It 
will be noted that the check is prepared for the use of stencils 
and “window” envelopes, thus saving a considerable amount 


PAYABLE THROUGH NEW YORK CLEARING HOUSE 


COMMON STOCK 
DIVIDEND No. 47 NEW YORK, DECEMBER 31, 1925 NOW a ees 


AMERICAN STEEL CAR COMPANY 


> 
< 


at BANKERS TRUST COMPANY 1-103 


Fo THE ORDER OF 


BANKERS TRUST COMPANY 


DIVIDEND DISBURSING AGENT FOR 


AMERICAN STEEL CAR COMPANY 


ASST, SECRETARY 


a 
« 
e 
* 
if) 
z 
< 
° 
z 
< 
° 
= 
° 
a 
| 
2 
a 
«< 
. 
° 
- 
z 
wi 
z 
> 
< 
a 
& 
4 
4 
° 
w 
=x 
ao 
g 
z 
- 


DIVIDEND OF $2.50 PER SHARE ON THE COMMON STOCK, STANDING 


IN YOUR NAME AT THE CLOSE OF BUSINESS, DECEMBER 14, 


Notify BANKERS TRUST COMPANY, 16 Wall Street, New York, of any change of address 


Form 59.—Dividend Check. 


264 WORK OF CORPORATE TRUST DEPARTMENTS 


of clerical work. The checks, of course, should not be mailed 
until the dividend agent has received, from its principal, funds 
to cover the total amount of its dividend checks. Provided 
funds are in hand it is customary for dividend checks to be 


Company uns (Aga cae 

Stock Lae Uy ae CLOT ING. 

Name 

Check No.2 oe Amount Le 
Payables No, of Shares 


Has check been returned 
Has check been paid 
Check remailed 


Duplicate check mailed_ 


Change of address made 


1041 ----Auditor---SP----Ind. 901---Release 


NS es 


Form 60.—Lost Dividend Check Search Eheet. 


STOCK TRANSFER ; 265 


mailed on the afternoon next preceding the day on which 
the dividend is payable. 


Lost dividend checks.—Through carelessness on the part 
of the recipient, miscarriage in the mails, or errors caused 
by the dividend agent, dividend checks are sometimes lost. 
In such cases, on receipt of notice from a stockholder that his 
dividend check has not been received or has been lost, the 
dividend agent will first examine the paid checks of the divi- 
dend in question to determine that the check has not been 
cashed, using for this purpose a blank such as Form 60. If 
the examination discloses that the check has not been cashed, 
an “indemnity letter’ as suggested by Form 61 will be sent 
to the stockholder for signature and upon receipt of the letter 


Form 61.—Indemnity Letter. 


19— 
To BANKERS TRUST COMPANY, 
Dividend Disbursing Agent, 
Dear Sirs:— 
I hereby request that you issue to me a duplicate of original dividend check 
of ————— Company, dated , No. , for $ , being dividend No. 
to which I am entitled as owner of shares of the stock of Com- 


pany; in consideration therefor I agree, for myself, my heirs, executors, and 
assigns, to indemnify and save you harmless at any and all times thereafter 
from actions, proceedings, claims and demands which may be made or brought 
against you in respect of such original check on your issuing to me such dupli- 
cate check. I agree to deliver or cause to be delivered to you such original 
check now lost or destroyed for cancellation and destruction if the same shall 
be found, and to reimburse you for all expenses incurred by you by reason of 
the issue of such duplicate check. 
Very truly yours, 


(Sign here) 
STATE OF 
COUNTY OF sd: 


—, being duly sworn deposes and says that affiant was, on the first day 
of 19—, the owner of shares of the stock of Company, and 
as such was entitled to the dividend accruing on such stock on that date. 

Affiant further says that any dividend check issued to afhant by Bankers 
Trust Company as Agent for said Company for the above mentioned dividend, 
is to afhant’s best knowledge and belief, lost or destroyed and that afhant 
has not at any time endorsed, transferred or otherwise negotiated any such 
check, but that affiant believes that if the same was sent by the Company 
it has been lost or destroyed. This affidavit is made to induce Bankers Trust 
Company to issue a duplicate check in lieu of said check so lost. 

(Sign here) 
day of 


Subscribed and sworn to before me this , 19—. 


NOTE.—The stockholder’s signature to this request must be came toate wn by a 
Notary Public, and if acknowledged outside of the State of New York, a certification of 
the attesting officer’s authority must be attached. 


266 WORK OF CORPORATE TRUST DEPARTMENTS 


properly signed, a duplicate dividend check will be issued and 
mailed to the stockholder. As a precautionary measure, many 
transfer agents quite properly insist upon the elapse of a spec- 
ified period, say 30 days, before issuing the duplicate check. 
It is surprising how many checks which are reported lost will 
turn up during such a period. On the other hand, if the ex- 
amination reveals that the check has been returned by the 
post office because of incorrect or insuficient address, the check 
will be remailed to the stockholder and there will be enclosed 
with the check a form on which the stockholder will be re- 
quested to indicate the address to which he desires subsequent 
dividends mailed. This should be carefully noted on the stock 
records. 


Stock dividends.—At times a corporation will distribute 
to its stockholders a dividend payable in its own stock, there- 
tofore unissued, or perhaps in its own stock previously issued 
but held in its treasury, or even in the securities of another 
corporation.” Such a distribution payable in stock of the com- 
pany itself is practically always handled by the transfer agent. 
The transfer agent should receive a certified copy of resolu- 
tions of the directors, declaring the dividend, fully setting 
forth the terms of the distribution, and directing the issuance 
of the new stock. Under some circumstances the transfer 
agent might require evidence of appropriate action by the 
corporation’s stockholders, but this is a question to be de- 
cided by the transfer agent’s counsel. For convenience in 
handling such a distribution the stockholders’ list is prepared 


HOBSON MOTOR CAR COMPANY SHEET No... 357. 
Record, of 10% Stock ‘Dividend payable April 15, 1924, to Stockholders of record at the close of business 
April 10, 1924. The shares represented by certificates hereon described 


constitute an es issue. 


sr | sreckmousem 


Form 62.—Stock Dividend Record. 


18 A distribution of this kind might be made either by the Reorganization 
or the Transfer Department. 


STOCK TRANSFER 267 


on a form somewhat different from the form used for cash 
dividends or meetings. Form 62 (in three parts) illustrates a 
good type of stockholders’ list for use in the distribution of a 
stock dividend. Form 62, the first sheet, is ordinarily used 
as a report to the principal office of the corporation; if there 
are co-transfer agents, additional copies may be made and 
used as reports to them. Form 62-A constitutes the original 
issue record of the transfer agent itself and postings to the 


HOBSON MOTOR CAR COMPANY ‘SHEET No. 
Combined Record of 10% Stock Dividend and Registered Mail Record. 
Stock Dividend payable April 15, 1924, to Stockholders of record at the close of business April 10, 1924. 


The shares represented by the co hereon described constitute an original issue. 


Shipment of 1... 


COUNTED ANO Geuvenne +6 Figured By 
Seaceo Post Orrica sy D B 
SEE si ge rawn By 
Audited By 
\ 
Examined By 


Enclosed By 


Form 62A.—Stock Dividend, Original Issue Record. 


Paceron-tal aa et oe et eee Post Office at CITY HALL STATION, N. Y. 
Received APRIL 14, (924, from. BANKERS TRUST CO., the following described 
pieces of registered mail (Letters) numbered from. Sto inclusive, 


making a total of ______—=ESipiecees. ee Peter tle st forlPostmaster: 


(im worps) 


REGISTRY AME OF ADDRESSEE 
NUMBERS STREET *AND POST OFFICE ADDRESS 


Ste Nay ee 
Page of Bill__-"" "ts Total of__._-_=—=—=s——s«RReegistered Pieces on Bill. ES 


AILING OFFICE 


| 
Received from BANKERS TRUST CO., the above described Registered Pieces, 


| nambered from__.____to inclusive. 


ANO OaTE 


for Postmaster. seinveeury 


Form 62B.—Stock Dividend, Post Office Receipt. 


268 WORK OF CORPORATE TRUST DEPARTMENTS 


stock ledgers are made direct from these sheets, a single 
summary entry referring to these sheets for details being made 
on the transfer record. ‘The spaces at the foot of each sheet 
are used to record the departmental checking of the issue and 
mailing of the dividend. By arrangement with the post office 
(which is glad to enter into such an arrangement with any re- 
sponsible transfer agent) Form 62-B is used as a post office 
registered mail transmittal sheet and receipt. In the case of 
a stock dividend involving thousands of separate shipments, 
the saving of detail to both the post office and the transfer 
agent is apparent, to say nothing of the elimination of the pos- 
sibility of errors due to the likelihood of discrepancies between 
the three records if separately prepared. 


Perhaps a word of explanation as to the headings of the 
columns covering the issue of the new certificates is advisable. 
In the parlance of “‘the Street’”’ stock certificates are generally 
divided into two classes—‘100’s” and “fractions,” namely, 
certificates for an even 100 shares and certificates for less than 
100 shares, but not certificates for a fraction of a share, the 
latter being termed “‘scrip’”. If a stock is listed on the New 
York Stock Exchange, certificates for more than 100 shares 
are not a “good delivery,” but, if such certificates are issued, 
they are treated, from the transfer agent’s point of view, as 
fractions. Form 62 has been prepared to cover a stock divi- 
dend at the rate of 10 per cent. Consequently, in the case 
of each stockholder owning a number of shares not evenly 
divisible by 10, it was necessary to issue scrip to cover the odd 
number of tenths. In the column headed “Certificate Num- 
bers” “‘C”’ indicates 100 share certificates, ‘‘Fr.”, certificates 
for less than 100 shares, and “‘S’’, scrip certificates for from 
one tenth to nine tenths of a share. With this explanation 
the corresponding subheadings under “Certificates Issued” 
will be more easily understood. 


Lost or destroyed stock certificates.— In regard to notices 
of the loss, theft, or destruction of stock certificates, and 
requests to stop transfer thereof and to issue duplicate certifi- 
cates, the trust’company as transfer agent confronts the same 
general problem as it does when acting as trustee in respect 
of lost, stolen, or destroyed bonds. The latter situation is 


STOCK TRANSFER 269 


discussed in Chapter V, page 85. An important difference is 
that under the law of some States bonds and stocks are not 
on the same footing as regards their transferability. Here, 
again, is a strictly legal problem and one as to which the 
transfer agent should, for its own protection and that of its 
principal, rely only on competent legal advice. A further 
point to consider is that, in the case of bonds, the amount 
of obligation is fixed, and usually the market value is subject 
to comparatively little fluctuation, while in the case of stock 
there is no fixed obligation and the possibilities of market 
fluctuation, especially of common stock, are almost limitless. 
Consequently, the question of the amount of proper indemnity 
assumes greater importance and the margin of safety in the 
case of stock should be greater than is generally deemed 
necessary for bonds. A bond of indemnity given in connec- 
tion with the issuance of a duplicate stock certificate should 
be executed in 3 counterparts, for the corporation, transfer 
agent and registrar respectively. Form 63 is well adapted 
for use in following through the necessary operations of a 
transfer department, on receipt of a ‘“‘stop transfer’’ notice 
and its final withdrawal. 


Destruction of canceled stock certificates—Transfer 
agents are continually faced with the problem of disposing of 
the steadily increasing accumulation of. canceled stock certi- 
ficates. The question arises: What period must elapse be- 
fore canceled certificates safely may be destroyed? 

The primary purpose of keeping stock certificates is to pro- 
tect the transfer agent against possible suits based on charges 
of forgeries of endorsements, guaranties, etc. Such suits 
would be difficult to defend in the absence of the certificates in 
question. ‘The statute of limitations in this state [New York | 
on such an action is ten years from the date of the forgery. 
This period, however, would not necessarily apply in all cases, 
as the running of the statute may be suspended by reason of 
incompetency, infancy, absence from the state, and certain 
other events. Therefore, it cannot be said with certainty that 
such an action would be barred in ten years from the date of 
the forgery. 

The forging of an endorsement on a stock certificate would, 
in most cases, imply a theft from, or loss by, an owner. It 


270 WORK OF CORPORATE TRUST DEPARTMENTS 


IMPORTANT 
Stop Transfer Record 


Name 
Company Stock 
Certificate No. No. of Shares 
Stop Acknowledged 
S. T. Form Sent 
Noted on Stop Board 

*? — Register 


Stock Ledger 


in Certificate Department 


Registrar Advised 

Transfer Agent in 

Stop Removed on Board 
a dg Register 


99 9 Ledger 


9 


i ; Cté. Dept. ; 
Advised Registrar 


’* Transfer Agent 


Form 63.—Stop Transfer. 


is the general experience of transfer departments that in such 
cases the owners lose little time in notifying them of the loss. 
It seems, therefore, that it would be rather improbable for the 
transfer agent not to receive notice or claim of forgery within 
ten years, or even within five years, after the forgery. 


STOCK TRANSFER 271 


As a practical matter, then, the risk involved is very slight 
if the period provided by the statute of limitations has elapsed 
from the date of transfer. Earlier destruction of the certi- 
ficates would mean that the transfer agent is willing to ac- 
cept, as a practical business matter, whatever risk may be in- 
volved. 

As stock certificates are not the property of the transfer 
agent they should be destroyed only on instructions, or 
at least with the written consent, of the issuing corporation. 
Some transfer agents are now solving the problem of canceled 
stock certificates by delivering them to the issuing corpora- 
tions after a period of several years has elapsed. 


General.—As explained in the preface, this book is written 
from the practical trust company point of view, and with no 
attempt to cover the many legal questions involved. In numer- 
ous places the reader is cautioned to seek the advice of coun- 
sel rather than to attempt, personally, to pass on questions of 
law. 


CHAPTER XVIII 


STOCK REGISTRATION, BOND REGISTRATION, 
AND COUPON PAYING DEPARTMENTS 


Stock registration — The appointment of an independent 
registrar is the almost invariable custom of companies whose 
stocks are publicly distributed. Such an appointment is a 
listing requirement of the New York Stock Exchange and 
many other exchanges. 

As heretofore explained, the prime duty of a registrar of 
stock is to check the issuance and cancellation of stock certif- 
cates so as to guard against any overissue. 


Appointment.—As a basis of its appointment as registrar 
of the capital stock of a corporation a trust company will 
require: 

1. A certified copy of resolutions of the directors of the 
company appointing the trust company and defining its duties. 
Form 64 is the form of resolution used for this purpose by a 
trust company in New York.’ 

2. Papers in form similar to those described on page 233 
et seq. (items 1, 2, 4 and 5) in regard to the appointment of a 
transfer agent. 


Form 64.—Resolution Appointing Registrar (Stock Out- 
standing Prior to Appointment). 


CERTIFIED COPY OF RESOLUTIONS 
of the 
BOARD OF DIRECTORS 
of 


On motion duly seconded, it was 
RESOLVED: 


First: That Bankers Trust Company, of New York, N. Y., be and it is 
hereby appointed agent of this Company, with the title “Registrar”, for the 
registration of certificates 
for the capital stock of this Company, of which there are now 
outstanding shares of said preferred stock and shares of said com- 
mon stock. 


1 This form is reprinted by permission of Bankers Trust Company, New 
York. 


272 


i 


STOCK AND BOND REGISTRATION 273 


SEcoND: That for the purpose of an additional original issue of cer- 
tificates representing such stock, the Registrar is hereby directed: 


To register and countersign as Registrar certificates for not exceeding 


shares of such stock, of the par value of $ each 
shares of such stock, of the par value of $ each 
shares of such stock, of the par value of $ each 


when ‘presented to it for that purpose and countersigned by the ‘Transfer 
Agent, and signed by* the and the of this Company. 


TuirD: That the Registrar be and it is hereby authorized and directed to 
register transfers from time to time of certificates for such capital stock, and 
of the certificates for shares of the preferred and shares of the 
common stock of this Company now outstanding, upon the cancellation of 
certificates for a like amount of stock of the same class, signed by the proper 
officers of this Company, and, as to certificates registered by said Registrar, 
countersigned by the Transfer Agent and the Registrar, and to register and 
countersign new certificates accordingly when they shall have been signed by 
the proper officers of this Company, and countersigned by the Transfer Agent; 
Provided, however, that the Registrar shall be under no duty whatever in 
connection with the names in which certificates are issued or the correctness 
of any transfer from one name to another. 


FourTH: That specimen signatures of the officers of this Company author- 
ized to sign certificates of stock as aforesaid, and of the officers of the 
Transfer Agent authorized to sign for the Transfer Agent, and specimen stock 
certificates, be lodged forthwith with the Registrar, to be used by it for pur- 
poses of comparison; and that the Registrar shall be protected and held harm- 
less in recognizing and acting upon any signature or certificate believed by 
it in good faith to be genuine. When any officer of this Company or of the 
Transfer Agent shall no longer be vested with authority to sign for this Com- 
pany or for the Transfer Agent, as the case may be, written notice thereof shall 
immediately be given to the Registrar, and until receipt of such notice the 
Registrar shall be fully protected and held harmless in recognizing and acting 
upon certificates bearing the signature of such officer or a signature believed 
by it in good faith to be such genuine signature. 


FirTH: That from time to time additional officers may be appointed by 
resolutions of the Board of Directors of this Company not inconsistent with 
its by-laws, to sign certificates of stock on behalf of this Company, and in 
like manner additional officers may be appointed to sign on behalf of the 
Transfer Agent, and in every such case certified copies of the resolutions effect- 
ing the appointments and specimen signature of such officers shall forthwith 
be lodged with the Registrar. 


SixTH: That when the Registrar deems it expedient, it may apply to 
, City of State of , counsel for this Company, or to its own 
counsel for instructions or advice, and for any action in accordance with such 
instructions or advice this Company will fully protect and hold the Registrar 
harmless from any and all liability. 


SEVENTH: In the event that any such certificate shall become lost or destroyed, 
before any new certificate or certificates shall be registered in lieu thereof, a sat- 
isfactory bond shall be required in such amount as may be provided by the by- 


* These resolutions should correspond to the provisions of the charter or certificate of 
incorporation, and by-laws, 


274 WORK OF CORPORATE TRUST DEPARTMENTS 


laws of this Company, and in any event not less than the value of such cer- 
tificate, wherein the Registrar shall be named as one of the obligees. ‘The 
bond shall be in a form satisfactory to the Registrar. 


EIGHTH: That the President and the Secretary of this Company 
be and they hereby are directed to certify a copy of these resolutions under 
the seal of this Company and to lodge such copy, together with certified specimen 
certificates of the stock of this Company in the forms duly adopted by it, 
copies of the charter or certificates of incorporation and all amendments 
thereto (properly certified by the Secretary of State) and of the by-laws 
of this Company, with the Registrar and to furnish to the Registrar certified 
copies of any amendments that may from time to time be made to the charter 
or certificate of incorporation or by-laws. 


We, the undersigned, President and Secretary, respectively, of the 
(hereinafter called “Company’’), do hereby certify that the foregoing is 
a true and complete copy of resolutions duly adopted at a meeting of the Board 
of Directors of the Company, duly held at No. in the City of ; 
State of , on the day of , 19—, at which a quorum was present 
and voted in favor of an adoption thereof. 


We further certify that the annexed certificates are true and correct speci- 
mens of the certificates of the capital stock of the Company which have been 
duly adopted by the Company, that the annexed schedule or signature card or 
cards set forth the officers of the Company and of , Transfer Agent, author- 
ized to sign such certificates, and that the signatures set opposite their respec- 
tive names are specimens of the genuine signatures of such officers. 


We further certify that the Company was duly organized under the laws of 
the State of , and that under the accompanying charter or certificate of 
incorporation and all amendments thereto, certified by the Secretary of State, 
the Company has authorized capital stock of $ , subdivided into 


shares, of the par value of each, of stock, 

shares, of the par value of each, of stock, 

shares, of the par value of each, of stock, 
WITNEss our hands and the seal of the Company this day of , 19—. 
President. 
(Corporate Seal) Secretary. 


Relations with transfer agent.—In New York it is the 
custom of the transfer agents to deliver to the registrar, in 
the morning, the new certificates and the canceled certificates 
representing transfers effected during the preceding business 
day. ‘The transfer agent will have canceled the signatures of 
ofhcers of the corporation and the transfer agent, but not the 
signature of the registrar. he registrar is expected to regis- 
ter the stock, which includes: (1) the cancellation of its sig- 
nature on the surrendered certificates; (2) the completion of 
the necessary entries on its records; and (3) the dating and 
signing, as registrar, of the new certificates, and to return 


STOCK AND BOND REGISTRATION 275 


both the old and the new certificates to the transfer agent 
before 1 o'clock, so that, in accordance with custom, the trans- 
fer agent may make delivery of the new certificates at 1:30 
o'clock on the next business day (Saturdays excepted) fol- 
lowing that on which the stock was accepted for transfer. 


Records.— The records of the registrar are simple. Forms 
65 and 66 are typical “registration sheets.’’ Form 65 is for 
use in the case of a stock which is transferred and registered 
in only one city, and Form 66 is for use in the case of stock 
which is transferred and registered in two or more cities on 
an interchangeable basis. The only substantial difference be- 


REGISTRY. OF : STOCK OF 


| pare | CERTIFICATES CANCELLED CERTIFICATES ISSUED 


Form 65.—Registration Sheet (One Registrar). 


tween the two forms is the subdivision of the cancellation 
columns into divisions for the cities in which the stock is trans- 
ferable, and the inclusion of balance columns for each city, 
so that the registrar’s records at any time will indicate the 
total number of shares issued from each city then outstand- 
ing. Form 66 is made up in as many copies as there are regis- 
trars and one carbon copy is mailed daily to each co-reg- 
istrar. 

These forms do not contain a column for “dating off” the 
canceled certificates. For many years it was the general 
practice of registrars to include on the registry sheet a column 
to the right of the ‘‘certificates issued’’ columns, headed “‘date 
of cancellation.’’ Each day the registrar, before returning 
the canceled certificates to the transfer agent, would go back 
through its registration record and stamp the date of cancel- 
lation in this column, opposite the original entry of each 
certificate canceled. ‘This practice, if accurately carried out, 


276 WORK OF CORPORATE TRUST DEPARTMENTS 


is a very good check against the possibility of registering 
stock in place of fraudulent or altered certificates, and in the- 
ory, at least, makes it possible for the registrar to take off a list 
of certificates at any time outstanding. However, it has been 
found from experience that it is almost impossible to main- 


COPPER MINING COMPANY 


GAPITAL .STOCK) | pate eee 
BANKERS TRUST COMPANY, NEW YORK, REGISTRAR 


BALANCE 
RK DaTEe 
ER SHARES } UMBER SHARES | jj NUMBER #£=/| SHARES New YorRK BosTON 
PRES EVRY Oak RS Es 
ane 


tain the complete accuracy of such a record and an inaccurate 
record of this kind is worse than none at all, to say nothing of 
the detail work involved in its maintenance. As a conse- 
quence, this system has been discontinued by trust companies 
handling a considerable volume of registrations. 


STOCK AND BOND REGISTRATION 277 


Original issues.—The registrar as well as the transfer 
agent should keep a careful record of all original issues of 
stock. Form 67 is almost identical with the similar form 


(No. 54) for use by transfer agents and described on page 
We 


Signing and audit.—In the case of trust companies where 
the volume of registrations is light, the officer in charge of 
the registration department personally will count the number 


BANKERS TRUST CO. "STATE INCORPORATED — 
REGISTRAR sath Ste er ee N I e 
TITLE OF COMPANY i sepa 
one PREFERRED 
_____. COMMON 
AUTHORIZED CAPITAL 


SHARES AUTHORIZED E: 
TO REGISTER TOTAL SHRS. 
REGISTERED REMARKS 
BY By i SORsTANDING 
COMPANY N. Y, STOCK EXCH. 


PAR VALUE CLASS OF STOCK 


Form 67.—Record of Original Issue. 


of shares represented by the old certificates and verify that 
total with the total shares represented by the new certificates. 
If the totals balance, he will cancel the registrar’s signature 
on the old certificates, and sign the new ones on behalf of the 
registrar. In companies where the volume is too heavy for 
this practice, auditors independent of the staff of the depart- 
ment will be assigned to the department to make this veri- 
fication. 


Certificates of deposit, etc.— As explained on page 198, it 
is an increasing practice, and a requirement of the New York 
Stock Exchange,’ to have a registrar appointed for certificates 
of deposit and voting trust certificates. The duties of the 
registrar under such an appointment are essentially the same 
as in the registration of stock certificates, except that its 
appointment comes from the protective or reorganization 
committee or voting trustees, and its dealings are with the 


2 See New York Stock Exchange requirements, pages 446 and 449, 


278 WORK OF CORPORATE TRUST DEPARTMENTS 


depositary for the committee or the agent for the voting 
trustees instead. of with a transfer agent. 


Stop transfers and duplicate certificates.—Stop transfer 
notices usually are filed with the registrar by the transfer 
agent. While the prevention of the transfer of certificates 
against which “stops” have been filed is not a part of the duty 
of the registrar, it ordinarily will cooperate with the transfer 
agent to the extent of filing such information and endeavor- 
ing, without assuming responsibility, to call the transfer 
agent’s attention to any certificate presented for cancellation 
against which a stop notice has been filed. oe 

Duplicate certificates must, of course, be registered, and the 
registrar will sign a duplicate against a certificate claimed to 
have been lost, stolen, or destroyed only if it receives: (1) 
satisfactory documentary evidence of the authorization of the 
issue of the duplicate certificate by the corporation; (2) 
evidence of due compliance with the regulations of any stock 
exchange on which the stock may be listed; and (3) a counter- 
part of the bond of indemnity filed in connection with the 
application for a duplicate certificate. Such indemnity should 
be given in favor of the registrar as well as the corporation 
and the transfer agent, and should be in form and amount 
satisfactory to the registrar. 


Bond registration.— While the great majority of bonds and 
other corporate obligations are payable to bearer and have 
interest coupons attached, also payable to bearer, it is pro- 
vided in most bond issues that the holder of a bearer bond 
may have his bond registered in his name at the office of the 
corporation or its agent. An appointment of this kind may 
be made by resolution as indicated in Form 68. 


Form 68.—Appointment of Bond Registrar. 


COMPANY 
CERTIFIED Copy OF RESOLUTIONS 
RESOLVED THAT BANKERS ‘TRUST COMPANY, of New York City, be and it 


f *Transfer Agent 


. Registrar, 
*Principal and Interest : 
Principal Bonds of this 


, issued or to be issued under the mortgage or 


hereby is appointed the Agent of this Company, with the title o 


for the registration of the of the 


due 


Company dated 


*Strike out designation not desired. 


STOCK AND BOND REGISTRATION 279 


deed of trust from this Company to 2 OL , as Trustee, dated , when 


presented to it for registration purporting to have been duly certified by said 
Trustee; and 


FuRTHER RESOLVED, that said Agent be and it hereby is authorized and di- 
rected from time to time, as any of such bonds shall be presented to it for that 
purpose, accompanied by instruments of assignment thereof executed by the 
registered holder, to transfer or discharge the registration thereof; and 


FURTHER RESOLVED, that this Company lodge with said Agent (1) specimen 
signatures of the officers of this Company authorized to sign or who shall have 
signed such bonds, (2) specimen signatures of the officers of said Trustee who 
shall be authorized to certify or who shall have certified said bonds, (3) speci- 
mens of said bonds, and (4) a copy of said mortgage or deed of trust and of all 
amendments thereof and supplements thereto, for use by said Agent for purposes 
of comparison, and in such action and in relying upon bonds purporting to be 
bonds of such issue and to bear the signatures of such officers this Company will 
protect such Agent until written notice to said Agent that any or all of said 
officers respectively are no longer authorized so to sign; and 


FURTHER RESOLVED, that when said Agent deems it expedient it may apply 
to , of mCity of , State of , counsel for this Company, or to its 
own counsel, for advice or instructions, and for its action in good faith in reli- 
ance thereon this Company shall fully protect and hold said Agent harmless 
from and against all liability; and 

FURTHER RESOLVED, that the President and the Secretary of this 
Company be and they hereby are authorized and directed to certify these resolu- 
tions under the seal of this Company and to lodge the same with said Agent. 


We, the undersigned, President and Secretary, respectively of 
Company, a corporation duly organized and existing under the laws of the 
State of , do hereby certify that the foregoing are true and complete copies 
of resolutions duly adopted at a meeting of the Board of Directors of said 
Company, duly held in the City of , State of , on the day of ; 
19—, at which a quorum was at all times present and voted in favor of the 
adoption thereof, and that said resolutions are still in full force and effect. 

We further certify that the specimen or specimens presented herewith of 
the bonds of said Company referred to in the foregoing resolutions is or are a 
true and correct specimen or specimens of such bonds, that the signatures of 
the officers of this Company and of the Trustee mentioned in the foregoing 
resolutions, as set forth on the accompanying sheets or lists, are the true and 
genuine signatures of the officers of this Company and of said Trustee author- 
ized to sign and to certify or who have heretofore signed or certified respec- 
tively, the bonds of this Company mentioned in said -resolutions, and that the 
accompanying copy of the mortgage or deed of trust mentioned in said resolu- 
tions and the accompanying copies of the amendments thereof and supplements 
thereto is or are a true copy or copies of the same. 

WITNEss our hands and the seal of said Company this 


day of , 19—. 


, President 


——, Secretary 


In this discussion the agent of a corporation to register its 
bonds is referred to as “bond registrar,’ although the less 
common title of “bond transfer agent’’ is really more nearly 
accurate. The duties of a bond registrar are to record, as the 


280 WORK OF CORPORATE TRUST DEPARTMENTS 


agent of the corporation, changes in the ownership of bonds, 
(1) from bearer to a designated owner, (2) from one desig- 
nated owner to another, or (3) from a designated owner to 
bearer. As used in this chapter, the title “bond registrar”. 
should not be confused with the title “‘registrar for identifica- 
tion” discussed in Chapter XIII (page 184). 

Bonds, by their terms, may be “fully registerable ”? that 4s 
registerable both as to principal and interest, or they may be 
registerable as to principal only. Many issues, particularly 
long-term bonds, provide for both forms of registration. 


Full registration—Full registration usually is accom- 
plished by the surrender and cancellation of outstanding 
coupon bonds and the issuance in their place of a bond or 
bonds without coupons, both principal and interest of which 
are payable only to the registered owner. ‘The text of a 
fully registered bond is set forth in the ‘“Telephone” mort- 
gage (page 335). Ownership of a fully registered bond may 
be transferred on the books of the company only by due 
assignment and upon the issuance of a new registered bond 
issued in the name of the transferee. As in the case of stock, 
each transfer involves the cancellation of the existing bond 
and issuance of a new bond.’ Many mortgages authorizing 
fully registered bonds also provide that the holder of a 
fully registered bond may, at his option, surrender his bona 
for conversion into a like principal amount of coupon bonds 
and that the mortgagor will provide sufficient coupon bonds 
to exchange all outstanding fully registered bonds. Of re- 
cent years corporations generally have adopted the practice 
of placing on the back of fully registered bonds a legend (see 
page 454) referring to this privilege and specifying by serial 
number the coupon bond or bonds into which each fully reg- 
istered bond is exchangeable. ‘This practice is recommended 


by the New York Stock Exchange.* 


8 There are exceptions to this statement. Some of the older mortgages pro- 
vide that a bondholder may secure full registration by surrender of his bonds 
for detachment and cancellation of all unmatured coupons, and registration 
on the back of the existing bond, in the space ordinarily used for registration 
as to principal only. Once fully registered such bonds cannot be reconverted 
into coupon bonds. ‘This practice is not common except under old mortgages. 


4See New York Stock Exchange requirements, page 453. 


STOCK AND BOND REGISTRATION 281 


Registration as to principal only.— Registration as to 
principal only does not affect the payment to bearer of the 
interest coupons as they mature, and is accomplished by in- 
scribing the date of registration and the name of the regis- 
tered owner, on the form provided for that purpose on the 
back of the bond (see page 82). Transfers are made on the 
books of the company kept by it or its bond registrar only 
upon presentation of the bond with an appropriate assign- 
ment. However, instead of the issuance of a new bond, as 
in the case of fully registered bonds, the date of registration 
and the name of transferee are inscribed by the company or 
registrar on the line below that used for the last previous 
registration of the bond. Each registration, of course, is 
signed by the company or its registrar, and no registration 
entered on the bond by other persons is valid.’ ‘Transfer- 
ability by delivery of a bond registered as to principal may 
be restored by registration to “bearer” and thereafter the 
same bond, from time to time, may again be registered and, 
subsequently, released by transfer to ‘‘bearer.”’ 


The mechanics of bond registration and transfer are sim- 
ilar to stock transfer, but as bearer bonds are more readily 
negotiable than stock (because no endorsement is required) 
the work of bond registration and transfer is usually assigned 
to a separate division rather than to the stock transfer de- 
partment. Practice differs as to whether this division should 
be grouped with the corporate trust department or with the 
stock transfer department. The work is closely allied to that 
of the stock transfer department; on the other hand, a trust 
company, in nearly every instance, will be trustee for 
most, possibly all, of the issues for which it is bond 
registrar. | 


Records.—Because of the similarity in the work involved, 
the records used by a bond registration division are modeled 
more or less after the records of the stock transfer depart- 
ment. 


5 This is not intended as a complete statement of the legal aspects of the 
case. Bonds ordinarily are negotiable instruments and subject to the law of 
negotiable instruments. ‘There are cases on the effect of a bondholder himself 
endorsing the fact of his ownership upon a bearer bond. 


282 WORK OF CORPORATE TRUST DEPARTMENTS 


Form 69 is the ‘“‘counter or window receipt” issued for 
bonds presented for registration. It isin two parts: (1) the 
left-hand portion is attached to the bonds as a means of iden- 
tification during the process of registration and is attached 
to the new or registered bond when registration is completed; 
(2) the right-hand portion is delivered to the person present- 
ing the bonds for registration and must be filled in, signed, 
and presented in order to secure delivery of the bonds on com- 
pletion of registration. 


No. 22139 Bond Registration Dept: 


psa ha ey ge Rese om BANKERS TRUST COMPANY 


———Company (reste ne nie Sein Eg 
: 


« * , 
F Principal on! $ of the 
To be registered as "© Principal ara Interest ‘ 


registered’ as to Pricciodl pos fillet as per statement below. 


Address 


Dated 


THE OWNER OR OWNERS OF SECURITIES REPRESENTED BY} 
THIS RECEIPT AGREE WITH THE BANKERG TRUST COMPANY’ 
THAT SUCH SECURITIES MAY BE DELIVERED TO THE BEARER 
HEREOF WITHOUT IDENTIFICATION 


Form 69.—Counter Receipt. 


The “bond registers” (Forms 70 and 71) correspond to 
the transfer records of the stock transfer department. Form 
70 is used for entries of bonds registered as to principal only, 
and Form 71 is used for recording changes in respect to fully 
registered bonds. 

Form 72 is the registered bond ledger sheet. It is posted 
from sheets 70 or 71 as the case may be. 

The use of Form 73 is confined to issues where the institu- 
tion acting as trustee has not been named as registrar of the 
bonds. For example, the issuing company may register its 
own bonds; but, as all newly issued bonds must be certified, it 
is necessary for the issuing company to turn over the new 
bonds to the trustee for certification and at the same time to 
surrender the canceled bonds for notation on the trustee’s 
records. 

Reports of changes between coupon and fully registered 
bonds are made to the issuing company on Form 74. 

Frequently corporations leave with the bond registrar a 
supply of fully registered bonds signed in blank, which the 


283 


STOCK AND BOND REGISTRATION 


sequinyy 
qdis22yy 


*(qso1oJU] pure jediouitg) p1osey uoneijsis9y— TL WI0 


jo auITy UT Jo amex 109g 


aanssiay saxog NO.1n09 _ ANTITAONVOS SALVOMMILNED SLLST OAM 


AANSSI SHLVOISILAAN TGUALSIONY 
*4S9J0]U! pue jedioutid 0} se poso}siso1 spuog 


“mo[aq payeudisap suosiod 30 uosiad ay) 01 ‘saweu 


aanoadsas sno ausoddo yas qnowe ayi sgysuen puke usisse Aqasay op ‘Auedwos jo 


spuog aSeSyo0u JO sI9pjoy pasaiside1 pausisispun ayy om *QIA19IISUL ILA 10L 


"(ATU [edioulg) ploday uoneljsisay— os Woy 


P54 OL CIYALSIOVN “SON GNOd persed 


-jedjoutad 03 sv poJaqs}Je1 spuog 


“mo}2q paieuSisep suosiod 10 uosiad ay. 0} ‘soureu 


eansadses ino* azisoddo 32s qunoule ay? Jojsues} pue uSisse Aqo1zsy op. ‘Auedwoz : ac 


spuog a8e8210 Jo s19pioy pasorsifos pousissopun on 2m “QIQIDIOYY INR IOL 


284 WORK OF CORPORATE TRUST DEPARTMENTS 


registrar may use when needed simply by having the bonds 
authenticated. It is essential that such bonds be kept under 
control. For that purpose the records and methods of the 
stock transfer department (Form 55, page 259) are applicable 
to bonds. Bonds are carried in the control at their face values, 
if expressed, and at one unit each if they are “in blank.” 


Registered as to 


Form 72.—Ledger Sheet. 


Forms 75 and 76 are respectively the list and check used in 
payment of interest on fully registered bonds, if interest is 
paid by the bond registrar as the agent of the debtor company. 
In the case of many bond issues, the books for the transfer 
of fully registered bonds close for a short period, say, two 
weeks, preceding each interest payment date, to give the pay- 
ing agent opportunity to prepare from the bond ledger a list 
of the bondholders on Form 74 from which the interest checks 
are drawn. ‘The payment of registered interest involves 
practically the same amount of work as the payment of divi- 
dends on stock. If the number of registered bonds is large, 
the paying agent probably will use a set of stencils, each 
stencil bearing the name and address of a bondholder. This 
greatly reduces the amount of detail and eliminates many 
typographical errors. It has become the practice of many cor- 
porations to mail registered interest checks on the afternoon 
of the day immediately preceding the interest date. By so 
doing, a large number of security-holders are enabled to re- 
ceive their interest on the due date. A paying agent should 
follow this practice only if it meets with the approval of the 
debtor corporation and provided, always, that funds are on 
deposit for the full amount of maturing interest. 


As in the payment of coupons (which we shall discuss pres- 
ently); the paying agent is required, in certain cases, to secure 


285 


STOCK AND BOND REGISTRATION 


jo aiyAy uy 


payne spnog praysiFay 


SONOG J39DVOLYOW 


"J99G UOT}BIYIED pue UoNEo.ueD— ¢Z WLIO 


PIyAwD spuoy uadnoy 


ANVdWOD 


paypourRD spuog paiaasiday pe|jao2aeD spuog vodno:) 


S3DV1d YISHL NI GalsILYsD SGNOG GNV aatnaoNnv> 
AO GYOD3Y 


WORK OF CORPORATE TRUST DEPARTMENTS 


286 


*Aueduios Sulnssy 0} 1oday—'p/, WOLF 


"AN¥YdNOD LSNUL SYANNYE 
‘sinof Ajniy As3A 
8 Aueduioy anok JO. uorzeiqstSaI oY} Ul epeur Ueeq sAeY soSury> BuIMo]]Oy BL], 


41335ULS TIVM OF 


ANAWLYNVdS0 NOLLVHLSIOSY 


STOCK AND BOND REGISTRATION 287 


from the owner of registered bonds income tax ownership 
certificates in respect to the interest paid. If such certificates, 
when required, are not filed with the paying agent prior to the 
date for mailing checks, it is customary to attach ownership 
certificates to the interest checks and stamp the checks with 
an endorsement reading: 

‘This check not payable or collectible unless accompanied 
by certificate of ownership of owner of bonds.” 


BANKERS TRUST CO 


ENT 


Form 75.—Registered Interest List. 


REGISTERED INTEREST 


TO THE ORDER OF 


PITTSBURG COMPANY. 
BANKERS TRUST COMPANY. acent 
BY 


ASSISTANT SECRETARY 
PAVANLK THR OUCH THE NPWYONK CLEARING HOUSE 


Form 76.—Registered Interest Check. 


Coupon paying.—The work of this department of a bank- 
ing institution involves (1) payment of coupons, (2) account- 
ing to its principal for coupons paid, and (3) services with 
respect to the Federal income tax. Normally, its relations 
with the debtor corporation® are those of agent to principal, 
but it is possible to impress with a trust, funds deposited to 


6TIt should be kept in mind that the coupon paying department does not 
always act for the debtor corporation; it frequently makes payments as agent 
for correspondent banks, 


~ 


288 WORK OF CORPORATE TRUST DEPARTMENTS 


pay coupons. In the case of insolvency of the debtor cor- 
poration or the service of a writ of attachment upon the pay- 
ing agent, the question of whether the funds are deposited 
with the trust company as paying agent or as trustee would 
be of prime importance. In such a contingency, action by the 
trust company should be taken only after a review, in consul- 
tation with counsel, of all of the facts of the specific case. 


Receipt of funds.—One of the first duties of the officer in 
charge of the department is to see that funds are received to 
cover, as they mature, all interest payable at his department. 
It is good practice to prepare, say, ten days before each ma- 
turity, a list of the issues to be paid and the amount of each. 
As remittances are received, they can be verified as to amount 
and checked off the list. A day or so before maturity the 
matter should be taken up with companies which have not 
remitted, so that on the day of maturity all necessary funds 
may be on hand. This practice not only goes far to avoid 
the confusion during a busy day resulting from withholding 
payment for certain issues, funds for which have not been 
received, but sometimes will save the debtor corporation the 
embarrassment which would follow an oversight in supplying 
funds to pay coupons at maturity. 


Relations with corporate trust department.— Usually the 
coupon-paying division of a trust company will pay the cou- 
pons from many issues for which the trust company is not 
trustee, and probably it will not pay all of the issues for which 
it is trustee. However, in the case of issues for which a trust 
company is both trustee and paying agent, it is advisable for 
the corporate trust department to secure from this division, 
at each interest maturity, a statement of the amount deposited 
and to compare this with the amount of bonds shown by 
their records to be outstanding. At the time that satisfaction 
of a mortgage is required, it will be helpful if a record has 
been maintained showing that at each interest maturity date 
funds were deposited with the trust company to pay interest in 
full on all bonds at the time outstanding. Often the amount 
deposited to cover an interest maturity will be less than the 
amount indicated by the trustee’s records to be required. Such 
a difference probably will be caused by one or more of the 
following factors: 


COUPON PAYING 289 


1. The amount of interest on fully registered bonds paid 
directly by the company or its bond registrar. 

2. Bonds held in the treasury of the company from which 
coupons are not collected. 

3. Bonds pledged by the company under other mortgages 
or to secure loans, and from which coupons are not collected. 

If, the size of the issue is sufficient to justify the trouble, 
and the debtor corporation is willing to codperate to the 
necessary extent, it is often advisable to arrange with the 
corporation to make a complete accounting to the trustee at 
each interest maturity by submitting for inspection the re- 
ceipts for registered interest or canceled checks covering such 
payments (unless the coupon-paying agent is also agent for 
payment of registered interest, in which case its records will 
suffice) and the canceled coupons from treasury or pledged 
bonds. ‘These items, together with the amount of funds de- 
posited to pay coupons in the hands of the public, should, of 
course, equal the amount of interest due on the total amount 
of bonds shown by the trustee’s records to be outstanding. 
While all debtor corporations are not willing to undertake 
such a complete periodical accounting of interest, it is a wise 
precaution for the trustee to make such a recommendation. 
Generally speaking, the trustee is not in a position to enforce 
such a request, for a claim of default under the mortgage 
based on non-payment of interest could not be set up until 
coupons had been presented for payment and payment refused. 


Federal tax law.—The provisions of the various Revenue 
Acts imposing the Federal Income Tax have added consider- 
ably to the duties of this division, by requiring the submission 
of income tax ownership certificates with coupons presented 
for payment. Ownership certificates have never been required 
in the case of issues by the United States Government, states, 
and other political subdivisions thereof, and in the case of cer- 
tain quasi-governmental issues such as Federal Farm Loan 
Bonds. Under the Federal Revenue Act of 1926 and the 
Treasury regulations thereunder, ownership certificates are 
not required in the case of bonds which do not contain the so- 
called “‘tax-free-covenant,’’’ or on any coupons which are 


7 There is an exception to this statement in the case of non-resident aliens. 
See page 104 for a statement regarding “tax-free-covenant” bonds, 


290 WORK OF CORPORATE TRUST DEPARTMENTS 


owned by a corporation. As both the law and the regula- 
tions relating to ownership certificates are frequently changed, 
no attempt is made here to discuss the subject, but the reader 
is referred to the several services on the Federal Revenue 
Tax.’ Under the law and regulations as they now stand 
(1926), the debtor corporation, or its duly appointed fiscal 
agent, is required to file the ownership certificates, accom- 
panied by a monthly list return, with the Commissioner of 
Internal Revenue at Washington, D. C., on or before the 
20th day of the month following the month of payment, and 
to file an annual return and pay the amount of tax withheld 
during the preceding calendar year, on or before March 15 
of each year. ‘The annual return and payment are made to 
the collector of internal revenue of the district in which the 
fiscal agent is located. Some corporations handle these re- 
turns themselves, and, in that event, the agent delivers the 
ownership certificates to the corporations with the monthly 
statements of the coupon accounts. In many cases, however, a 
corporation desires to be relieved of this duty and appoints 
the trust company which acts as its paying agent, as fiscal 
agent for this purpose. The following is a form used by a 
New York trust company to cover such an appointment. 


Figure 15.—Appointment as Fiscal Agent 


National Trust Company, 
200 Wall Street, 
New York, N. Y. 


Dear Sirs: 
The undersigned, —————, a corporation organized under the laws of the 
State of New York, with its principal office at ————— in the County of 


State of New York, has appointed and does hereby appoint National ‘Trust 
Company, a New York corporation, with its principal office at No. 200 Wall 
Street, New York City, the Fiscal and Paying Agent of the undersigned, for 
the purpose of paying and with full power to pay at the office of said National 
Trust Company in the City of New York, State of New York, the interest 
upon the Mortgage Gold Bonds, Series —, due of the undersigned 
corporation, dated , and issued under a mortgage to National Trust Com- 
pany, Trustee, New York City, dated as such interest from time to 
time matures. 

The said National Trust Company is hereby further constituted the agent 
and attorney of the undersigned for the purpose of collecting any and all income 


8 Among the authoritative services are those of (a) Prentice-Hall, Inc., (b) 
Corporation ‘Trust Company. 


COUPON PAYING 291 


taxes required to be collected under the Revenue Act of 1926, or any amend- 
ment thereof, and the Treasury Department regulations pertaining thereto 
upon the interest so paid from time to time on the above-mentioned obliga- 
tions of the undersigned corporation, and is hereby authorized and empowered 
to make any and all payments and reports to, and to file any and all returns 
and accompanying certificates with the Federal Government, which, as such 
agent, it may be permitted or required to make or file under the Revenue Act 
of 1926 or any amendment thereof, and the Treasury Department regulations 
pertaining thereto. 

Copy of this appointment is being contemporaneously filed with the Collector 
of Internal Revenue for the District in which the undersigned is located. 

In consideration of your acceptance of this appointment, and of the per- 
formance on behalf of the undersigned of its duties in connection with the 
above-described obligations under the withholding provisions of the Revenue 
Act of 1926, or any amendment thereof, and of the Treasury Department reg- 
ulations pertaining thereto, the undersigned hereby agrees to indemnify and 
hold harmless your company from any and all costs, expenses, attorneys’ fees, 
and other disbursements or liabilities which may or can accrue or be incurred 
from acting in such capacity of Fiscal and Paying Agent under the Revenue 
Act of 1926, or any amendment thereof, and the Treasury Department regula- 
tions pertaining thereto. 

It is understood that this appointment may be revoked at any time by the 
undersigned, and that the Fiscal and Paying Agent appointed hereunder may 
resign the appointment at its option. 


Very truly yours, 


FP 206 


Description COUPONS DUE 


COUPONS. RETURNED FOR 
REASON MARKED 


COUPONS AT__ 


f Coupons not paid by us 


Name and Address of owner COUPONS AT 


Required 3 


COUPONS AT_—~__. 


| Coupons not due 
Present again TOTAL 
No funds 


Bonds have been called. 


ical 
Zz 

At 
=| 
{0 

Uy: 
Real 
Fe 

ben oe 
fei 
ng 
2: 


CHECK TO ORDER OF.__ aan aw 
PLEASE USE SEPARATE ENVELOPE FOR EACH CLASS OF COUPON 


Form 77.—Coupon Envelope. 


Records.—As coupons are presented for payment, most 
paying agencies will insist that they be enclosed in a standard 
form of coupon envelope, illustrated in Form 77, and that a 
separate envelope be used for each class of coupons. The 
requirement that all coupons be presented in envelopes uni- 


292 WORK OF CORPORATE TRUST DEPARTMENTS 


form in size and marking, greatly facilitates the detail work of 
handling coupons and is a factor in insuring accuracy. While 
the large majority of coupons are presented for payment 
over the counter, some will reach the paying agent by mail, 
and it is the usual practice of the department to prepare its 
own envelopes for all mail items, thus securing complete 
uniformity on all coupon payments passing through the de- 
partment. 


RETURN tTo__ 


TAX DEDUCTIONS 


Aq pearesey 


bs) 
3 
& 
= 
J 
a 
° 
¢£ 
3 
ea 
3 
aq 
oe 
° 
” 


TOTAL $ 


oS 
TAX DEDUCTIONS 


FROY BANKERS TRUST COMPANY ®uR CHECK 
COUPON DEPT. TOTAL (AS PER LIST) 


Form 78.—Return Envelope. 


As each lot of coupons is received for payment, they are 
carefully examined and counted at the counter, the clerk mak- 
ing the verification initialing the envelope. If it is found that 
coupons have been presented which, for some reason, are not 
payable, notation is made in the space at the left of the 
envelope, and such coupons are enclosed in a return envelope 
(Form 78), for return to the presentor with the check issued 
in payment of the remainder of the coupons. 

Upon completion of the verification the coupons are can- 
celed, and the initialed envelopes containing the canceled cou- 
pons delivered to clerks who draw the checks in payment. 


4: 
Withheld 


Form 79.—-Check Register. 


COUPON PAYING 293 


The checks, as drawn, are entered on a “check register’’ 
(Form 79). ‘The serial number of the check is entered in 
the column to the left, the payee’s name is entered on the same 
line in the column headed “Description,” and on the succeed- 
ing lines of this column are entered separately the description 
of each class of coupons included in the payment. The amount 
of each class of coupons is entered on the corresponding line 
of the next column, and the amount, if any, of tax to be 
withheld on the corresponding lines in the column headed 
‘Tax Withheld.” On the last line of the entry under the 
headings ‘‘Total ‘Tax’ and ‘Amount of Checks” is entered, 
respectively, the total amount of tax to be withheld and the 
amount of the check drawn in full payment of the block of 
coupons covered by the entry. The right-hand column headed 
‘‘Remarks’’ may be used to note the return of coupons im- 
properly presented and for other purposes. 


Coupons are seldom presented for payment by the actual 
owner, who usually finds it more convenient to collect them 
through his bank. For example, in the case of coupons pay- 
able in New York, the actual bondholders scattered through- 
out the country will, at or just before, the maturity date, 
deposit their coupons for collection with their local banks. 
Each local bank will assemble its New York coupons and ship 
them to New York for collection, or perhaps forward them 
for collection to its banking correspondent in the nearest large 
city which, in turn, will assemble all New York coupons and 
send them for collection to its correspondent in New York. 
As a consequence, coupons for payment are received by the 
paying agents in the financial centers largely through the 
other banks in the same city and in substantial amounts. Thus, 
many of the entries on the check register will include several 
different issues of coupons, and each issue will be composed, 
perhaps, of several small lots of coupons originating in differ- 
ent sources. 


At the end of the day the coupon envelopes are sorted into 
issues and again totaled and the aggregate proved to the total 
of the check register. ‘The total payment of each issue is en- 
tered in the cash journal of the department (which is similar 
to the corporate trust journal illustrated on page 68) and 

subsequently posted to the various accounts in the ledger 


294 WORK OF CORPORATE TRUST DEPARTMENTS 


(Form 80). ‘The tax withheld as shown by the check reg- 
ister is entered on tickets (Form 81), and from these tickets 
posted to the ledger in separate tax accounts carried on 
Form 80. ‘The total taxes withheld in respect to each issue 
are later paid over to the debtor corporation, or directly 
to the collector of internal revenue, if the paying agent acts 
also as fiscal agent. 


Bankers Trust Ca 


Until recently it has been the custom of paying agents to 
carry a separate ledger account of each maturity as well as 
each issue of coupons. As a number of coupons of each 
maturity normally remain outstanding for considerable pe- 
riods, sometimes years after maturity, the number of accounts 
on the ledgers of the active paying agents became a burden, 
and many of the larger agents have now discontinued carrying 
a separate account for each maturity and, instead, carry 
simply one account for each issue. 


TAX DEDUCTIONS & CHECKS 


Date 


CREDIT ACCOUNT 


OUTSTANDING CHECKS 


RECAPITULATION 


Form 81.—Tax Deduction Ticket. 


COUPON PAYING 295 


If the paying agent does not act as fiscal agent under the 
Federal Income Tax Law, the ownership certificates are per- 
mitted to remain with the canceled coupons in the payment 
envelopes. If, however, the paying agent acts as fiscal agent, 
the ownership certificates are removed on the second count 
of the coupons and are filed for listing on the monthly list 
returns to the Commissioner of Internal Revenue at Wash- 
ington, D. C. | 


We are today forwarding you, accompanied by certificates of ownership, the following cancelled coupons 
which have-been paid and charged against your account, and we would request that they be counted and examined 
as soon as possible, advising us promptly of any differences. If no notice of any discrepancy is réceived within 
thirty days from the date hereof, this statement of account will be considered correct. 


Balance. 


Received from BANKERS-TRUST COMPANY the coupons described. in its statement aggregating 
$_—_________accompanied ‘by certificates of ownership, said’ coupons having been paid out of funds 
deposited for that purpose. The balanee of $. remaining to the credit of this coupon 


account as per statement rendered; i SP in Cher needs Paes correct, 


Please sign officially and return in enclosed envelope. 


Form 82.—Coupon Account, Statement and Verification. 


296 WORK OF CORPORATE TRUST DEPARTMENTS 


Statements on coupon accounts are rendered periodically, 
usually monthly, and the canceled coupons returned to the 
debtor corporation as vouchers. Form 82 illustrates a cou- 
pon account ‘‘statement and verification.” 


Audit.—As coupons are bearer instruments, and readily 
negotiable at maturity, it is most important to maintain a 
current audit of the work of the coupon-paying division. 
In many companies this is accomplished by a force of 
auditors assigned to a separate cage, attached to the cou- 
pon-paying division. Upon proof of each day’s work, the 
canceled coupons are delivered to the auditors, who verify 
them with the total cash disbursed during the day and retain 
the canceled coupons until the monthly statements are pre- 
pared by the paying division. ‘These statements are then 
delivered to the auditors who verify the total debits shown 
thereon with the aggregate of canceled coupons of the issue 
in question, which are in their possession. If the two totals 
agree, the canceled coupons and statement are sent to the 
debtor corporation. ‘The return envelope enclosed with the 
statement is addressed to the audit department. When the 
customer’s verification is received and reconciled to the ledger 
account, it is delivered to the coupon-paying division for 
filing. 


Payments for correspondents.—In the larger cities espe- 
cially, coupons often are paid for the account of banks in 
other cities acting as paying agent for the same issue. For 
example, an issue of bonds is sold in Chicago. ‘The bonds 
provide that the interest thereon shall be payable at the hold- 
er’s option at, let us say, the Tenth National Bank of Chicago 
or the Fifth Trust Company of New York. Normally the 
debtor corporation will deposit funds for the payment of the 
interest, as it matures, on the entire issue, with whichever 
of the two banks it considers the principal paying agent, and 
will request that bank to arrange with the other to honor 
such coupons as may be presented to it. Assuming that the 
deposit was made with the Tenth National Bank of Chicago, 
that bank would then advise the Fifth Trust Company in 
New York of the full details of the issue and request it, after 
receipt of advice that the funds necessary to cover the pay- 
ment have been deposited with it (the Chicago bank), to pay 


P 
_—" 


COUPON PAYING 297 


FIFTH AVENUE OFFICE [ie i j © Weal rievy-seventH st. OFFice 
STH AVE. AT 42ND ST ‘ mis i) MADISON AVE. AT 37TH ST. 


NEW YORK ’ CO. MPANY. - NEW YORK 


PARIS OFFICE-3 & S PLACE VENDOME 


LONDON OFFICE -26 OLD BROAD sT E, Cc. 2 
WALL STREET OFFICE 


16 WALL STREET 


COUPON DEPARTMENT 
NEW YORK, 


WE CHARGE YOUR ACCOUNT FOR COUPONS PAID AS LISTED, 
YOURS VERY TRULY. 


ASST. SECRETARY. 


Description Amount 


Form 83.—Daily Advice. 


298 WORK OF CORPORATE TRUST DEPARTMENTS 


ic) Se, 


We have this day forwarded you a package of properly cancelled coupons as stated below, 


accompanied by certificates of ownership, the Bid coupons having been paid and charged to your 


= = 
ee 
L ot 


Received from BANKERS TRUST COMPANY the coupons described in its statement, 


dated__t_ageregating $C accompanied by certificates of ownership, 


said coupons having been'paid and charged to our account. 


Please sign officially and return in enclosed envelope. 


Form 84.—Monthly Statement and Receipt. 


such coupons of the issue and maturity as might be presented, 
charging the amount thereof to the draft account of the 
Tenth National Bank. Under such an arrangement it would 
be usual for the Fifth Trust Company to send daily advices 
of payments to the Tenth National Bank and to return the 
canceled coupons monthly. Form 83 illustrates the daily 
“advice’’ and Form 84 the monthly “statement and receipt”’ 
for canceled coupons. 


Coupons from called bonds.—In the case of coupons from 
bonds which have been called for redemption prior to matur- 
ity, it is important for the coupon department to prevent the 
encashment of coupons maturing after the date of redemp- 
tion. In the case of a partial call, where numbers have been 


COUPON PAYING 299 


selected by lot, this requires an examination of the serial num- 
bers of all coupons presented from such issues. 

While it is not a part of the duty of the paying agent, it 
is the usual practice, in the case of coupons detached from 
called bonds and maturing on the redemption date, if unac- 
companied by the bonds themselves, for the paying agent to 


NOTICE OF BONDS CALLED FOR REDEMPTION 


The bonds to which the coupons covered by this check pertain have 
been called for redemption, or have otherwise become due. To avoid loss 
of interest to bondholder, the bonds (if not already paid) should be prompt- 


ly presented for payment to our Corporate Trust Department. Please see 
that this notice is returned to the party from whom the coupons were 
received by you. 


BANKERS TRUST COMPANY 
NEW YORK CITY 


F.3096 2473 


Form 85.—Redeemed Bond Notice. 


make an effort to bring to the bondholder’s attention, the 
fact that the bonds to which the coupons pertain have been 
called for redemption. The usual method is to attach to the 
check issued in payment of the coupons, a notice along the 
lines of Form 85, or, where bonds have been selected by lot, 
a copy of the redemption notice giving numbers of the bonds 
so drawn. Unfortunately, it is most difficult to be sure that 
the notice will reach the actual bondholder. As previously 
explained, coupons normally pass through a chain of collect- 
ing banks before reaching the paying agent and, as no record 
of the serial numbers of the coupons ordinarily is kept by the 
collecting banks, it is frequently impossible for the collecting 
banks properly to pass the notice back. 


To draw the attention of bondholders to the fact that their 
bonds have been called for redemption, some paying agents 
return coupons maturing on the date of redemption (if pre- 
sented apart from the bonds) and notify the holders thereof 
that both bonds and coupons will be paid if presented simulta- 
neously. While done for the protection of bondholders and 


300 WORK OF CORPORATE TRUST DEPARTMENTS 


to prevent loss of interest on their part, this practice meets 
with frequent objection from bondholders, particularly in 
cases where the bonds and coupons have been sent separately 
and reach the paying agent through different channels. 


Retention of canceled coupons.— Of recent years a number 
of corporations, to relieve themselves of the detail of hand- 
ling canceled coupons have requested the paying agent to re- 
tain the canceled coupons, to cremate them periodically, and 
to furnish the company with proper cremation certificates. 
The theoretical objection to this plan is that the debtor cor- 
poration receives no vouchers for the funds which are dis- 
bursed on its behalf. If the trust company which is paying 
agent is also trustee for the issue, the debtor corporation 
may advance the argument that its obligation is ended when 
it has paid to the trustee, on behalf of the bondholders, funds 
sufficient to care for the matured interest. As a matter of 
fact, this is not strictly true, as the coupon is the company’s © 
obligation and, if unpaid, may be the basis of a suit by the 
holder against the company, although the company in turn 
probably would have recourse against the trust company as 
paying agent. Another factor from the trust company’s point 
of view is that in dealing with coupons which are practically 
the equivalent of cash, it is most desirable to have a monthly 
verification which is secured through the practice of rendering 
monthly statements and returning canceled coupons. 


Stop payments.—Coupons against which “stop payments” 
have been filed are even more difficult to detect than “‘stopped” 
bonds. Paying agents, generally, take the position that they 
will not assume any responsibility for preventing the payment 
of coupons against which ‘‘stop’’ notices have been filed; 
but they do undertake to use their best efforts to withhold 
payment, at least until they have communicated with the per- 
son who has filed the “‘stop” notice. If, in such a situation, 
the latter insists that his ‘‘stop”’ notice be enforced, the proper 
procedure on the part of the paying agent is far from clear. 
In some cases the presentor of the coupons is requested to 
furnish evidence of the fact that he is a holder in due course 
for value. If satisfactory evidence on this point is received, 
the paying agent probably will make payment of the coupons 
(which are bearer obligations) despite the “‘stop” notice and 


COUPON PAYING 301 


so notify the person who filed the “stop,” at the same time 


offering to furnish him with such information as may be 
available regarding the facts surrounding the payment. In 
any case where conflicting claims arise it is always advisable 
to consult counsel before making payment, as the particular 
circumstances of the case in hand may have an important 
bearing on the legal aspects of the situation. 

“Stop’’ notices relating to coupons should be acknowledged 
with a letter following the general form suggested on page 
87 with such changes in detail as may seem appropriate. 


Return of coupon money.—As stated earlier in this discus- 
sion, funds for the payment of coupons ordinarily are 
deposited with a trust company as paying agent and, if this 
is so, the debtor corporation as principal has the right 
to withdraw the balance of the funds at any time. ‘This, of 
course, would not hold true if the funds on deposit had been 
impressed with a trust for the benefit of the coupon-holders. 
In the case of a mortgage for which a trust company is trustee 
as well as paying agent, the corporate trust department, upon 
satisfaction of the mortgage, should notify the coupon de- 
partment and the coupon department should thereafter con- 
sult the corporate trust department before releasing any of 
the funds to the debtor corporation. This is for the reason 
that, through the satisfaction of the mortgage the trust 
company has given up its lien and, consequently, may be held 
liable to the bondholders for the payment of sums remaining 
due on account of principal and interest. Before releasing 
the mortgage the trustee would have satisfied itself that funds 
were on deposit for the full payment of principal and interest 
due, and it would object, of course, to the return of any of 
these funds to the debtor corporation until the obligations 
which the funds were intended to meet had been properly 
canceled and surrendered to it. 


CHAPTER XIX 
FEES 


Fees.—In recent years many banking institutions have been 
carefully analyzing the relation between income and expense. 
The result, in so far as it relates to the work of the corporate 
trust and agency group, has been, in many cases, a distinct 
shock. The executive of a successful department should al- 
ways have available full information as to the expenses of 
his department both direct and indirect, so that he can readily 
determine the current margin of profit. A condition produc- 
ing unsatisfactory results must be corrected if the department 
is to justify its existence to the organization as a whole. Such 
a condition may be improved in one of three ways: 


1. Increased volume of business.—Because of the ex- 
tremely technical nature of fiduciary business, any department 
to operate efficiently, must be organized on a basis which 
involves a substantial expense. Consequently, many trust 
departments, particularly during the earlier years of their 
existence, fail to show a satisfactory profit, because the volume 
of business handled has not reached the point required to 
carry the minimum efficient organization. In such a situation 
the entire organization of the institution should codperate 
with the trust officer in his effort to increase the volume of 
business. 


2. Decreased expenses.—The possibility of decreasing the 
expense of operation should, as in all lines of business, never 
be lost to sight; but the desire for increased profits should not 
be permitted to result in decreasing expenses to the detriment 
of service. 

3. Increased compensation.—Assuming that a careful an- 
alysis of the situation indicates that the trust department, as 
compared with competitors, is doing a satisfactory volume 
of business, and its expenses are reasonable, the one remain- 
ing method of improving conditions, and the natural and 
proper one, is through an increase in the scale of fees. 


302 


FEES 303 


More important, however, than a mere increase in rates 
is standardization on a proper and equitable basis. Competi- 
tion in rates is, in the long run, bound to react unfavorably 
on trust profits; and it also is likely, through the necessary 
effort to cut expenses to meet reduced income, to affect ad- 
versely the quality of trust service. 

The question of standard rates has been carefully studied 
by the rust Company Section of the American Bankers As- 
sociation, by the Corporate Fiduciaries Association of New 
York City, and by similar organizations of trust officers in 
some of the larger cities. Varying conditions in the different 
financial centers have made it difficult to adopt standard rates 
applicable to the country as a whole, but real progress along 
these lines has been made recently in some cities. 

The following schedules covering corporate trusts and cor- 
porate agencies are those in general use in New York City. 
The fees quoted are intended to be minimum rates and, ac- 
cordingly, are subject to increase if the features of a particular 
account so warrant.’ 


Corporate Trusts. 


Initial fee—If preliminary negotiations are involved, if 
there is collateral to be received, if the trust indenture is 
executed in a large number of counterparts, if the ‘‘closing” 
involves the satisfaction of prior mortgages, the payment 
of prior issues, or the receipt and payment of outstanding 
obligations, such as promissory notes, etc., and/or the deliv- 
ery of certain bonds of the issue against cash or otherwise 
in accordance with the instructions of the obligor, or, in other 
words, wherever the opening of the trust has resulted in more 
work to the trustee than the mere execution of the trust 
instrument in a small number of counterparts, there should 
be charged an initial fee of $100 or more, the exact amount 
to be arrived at by an appraisal of the services rendered. 


Certification charges.—For the authentication of tempo- 
rary bonds in large denominations against which trust receipts 
or interim receipts are issued, or for the authentication of 
large temporary bonds which are to be used as collateral to 


1 The rates published herein are based on the schedule of fees approved by 
the Corporate Fiduciaries Association of New York City (1926). 


304 WORK OF CORPORATE TRUST DEPARTMENTS 


a note issue, a parent company bond issue, for bank loans, or 
which are to be held in the treasury of the Company, or other- 
wise: $100 for the first $1,000,000 principal amount; $50 
for each $1,000,000 in excess thereof, with a maximum fee 
of $1,000. 

For the authentication of temporary bonds of.other denom- 
inations: $2 per $10,000 bond; $1 per $5,000 bond; 30 cents 
per $1,000 bond; 20 cents per $500 bond; 10 cents per $100 
bond. 

For the authentication of definitive bonds: $3 per $10,000 
bond; $1.50 per $5,000 bond; 50 cents per $1,000 bond; 
30 cents per $500 bond; 20 cents per $100 bond. 

The minimum charge for the certification of an entire issue 
of bonds or notes should be $250 except for so-called “real 
estate’ mortgages on single parcels for which the minimum 


is $100. 


For signing definitive trust certificates under Philadelphia 
plan: Requiring two signatures of officials of the bank or 
trust company—75 cents per $1,000 certificate. 

For the countersignature or registration (for identification 
as to issuance) of temporary or definite bonds, in denomina- 
tions of $1,000, $500 or $100, 25 cents per signature. 

For the issuance of bankers’ receipts, interim receipts, or 
trust receipts: against the deposit of bonds, 50 cents each; 
against cash, 25 cents each, if cash remains on deposit 10 
days or more, otherwise 50 cents. For sorting, listing, and 
cremating bankers’ receipts, interim receipts, and trust re- 
ceipts, and interest warrants detached therefrom: regular cre- 
mation rates (see page 307). 


Annual fees.— 

(a) For ordinary services as Trustee of unsecured note or 
debenture issues, where there are no periodic duties other 
than general to be performed by the Trustee: 


NoTeE.—The fees quoted above for the certification or countersignature of 
temporary bonds and for the issuance of bankers, interim, or trust receipts 
cover also the exchange of the temporary bonds or receipts for definitive 
bonds, but not out-of-pocket expenses in connection with the exchange, such as 
postage and insurance on shipments of definitive obligations to out-of-town 
holders. 


FEES 305 


On authorized issues up to 1,000,000 principal amount ...... $100 per annum 
On authorized issues, 1,000,000 to 3,000,000 .................. 150 per annum 
On authorized issues, 3,000,000 to 5,000,000 ............ee000% 250 per annum 

Overs 5;000,000 to. ec te kl aie mis aden proportionately 


(b) For ordinary services as Trustee of unsecured note 
or debenture issues, collateral trust or equipment trust inden- 
tures, or real estate mortgages, where there are specific duties 
to be performed each year by the Trustee: 


On authorized issues up to $1,000,000 principal amount ...... $150 per annum 
On authorized issues, 1,000,000 to 2,000,000 ................4.. 200 per annum 
On authorized issues, 2,000,000 to 3,000,000 .................. 250 per annum 
On ‘authorized issues, 3,000,000 to, 5,000,000 -........00.00cse0e 300 per annum 

_ On authorized issues, 5,000,000 to 7,500,000 ...............48. 400 per annum 
On authorized issues, 7,500,000 to 10,000,000 ...............00. 500 per annum 
Ovesmig, QUO. U00N ete tu. heloesa «ls proportionately 


When the bonds are issued in two or more series, the an- 
nual fee is based on the aggregate principal amount of all 
series of securities outstanding. 


For holding stock as collateral.— Minimum annual charge 


of $25. 


BLOD RDS CANIN fOr fNGs YSPY ecie baw ccie tars css ve ele oo oe $1,000,000 par value 
S0' per annum each on) the next es). ik ee ee 4,000,000 par value 
ee Perea SAC ON THECREXt, 4), csc tees cis ee able eee s 5,000,000 par value 

tee0sper annum each, on all) above... /.0. 006.065 ee ane 10,000,000 par value 


Possible services—Statements to Company and its auditors, vault space, 
substitutions, collections and disbursements, proxies. 

Nore.—If the collateral is all in one piece or very few pieces, or if there 
is no activity or very little activity in connection with collateral, the above 
schedule should be cut in half, with a minimum annual fee of $25. 


For holding bonds as collateral.— Minimum annual charge 
of $25—1/40 of 1 per cent per annum on the first $5,000,000 


principal amount. 


$200 per annum for each million on next ........ $5,000,000 principal amount 
150 per annum for each million on next ........ 5,000,000 principal amount 
100 per annum for each million on next ........ 5,000,000 principal amount 
50 per annum for each million over ........... 20,000,000 principal amount 


Possible services—Statements to Company and its auditors, cutting and 
collection of coupons, or cutting, cancellation and delivery of coupons, substi- 
tutions, vault space. 

Notr.—If the collateral consists of bonds which have been refunded and 
are stamped or canceled — one-half of the above charge should be made, except 
that the minimum annual charge is to be not less than $25. 


For “holding alive’ in the Sinking Fund, the above fees 
should be charged if the coupons are to be cut semi-annually; 
if the coupons are not to be cut, one-half of the above charge 


306 WORK OF CORPORATE TRUST DEPARTMENTS 


should be made, except that the minimum annual charge 
should be not less than $25. 

Temporary bonds and registered bonds in large denomina- 
tions are to be classed as stock and the charge for holding 
same to be one-half of regular stock collateral charge. 

Mixed collateral of bonds and stock to be charged at rate 
quoted on each class. 


For holding uncertified bonds.—Bonds held for future 
certification and delivery, except bonds held for purpose 
of exchange for bonds of other denominations, a charge of 
$50 per annum for each 500 pieces so held. 


Purchases and redemption.—At maturity, or by call as a 
whole of the entire amount outstanding: 


T/10' of (396 ot Bretig a ie GG Seem ee $500,000 principal amount 
1720: 08° 1%. con meet Ul us by cl aaie soso eae ee ne 500,000 principal amount 
L/30. OF (196 ON TEX hates chs ca Spleen ee 4,000,000 principal amount 
1/40 of) 19> (on exeess (Over 42. Gone ae ea 5,000,000 principal amount 


For the purchase of bonds or notes for account of the 
sinking fund by advertising for sealed offerings, or in the 
open market without advertisement, for each operation, 

1/8 of 1 per cent of the principal amount of the bonds or 
notes so redeemed on the first $100,000 principal amount. 

1/16 of 1 per cent on the next $100,000 principal amount. 

1/32 of 1 per cent on all over $200,000 principal amount, 
with a minimum fee of $25 per operation. 

For the redemption of bonds or notes through call of part 
of the issue outstanding, 1/10 of 1 per cent of the principal 
amount of the bonds or notes so redeemed, with a minimum 
fee of $25 per operation. 

In lieu of the above fees, funds so to be used in the pur- 
chase or redemption of bonds may be deposited with the 
Trustee without interest from one week to two weeks in 
advance of the date upon which they will first be subject to 
use, depending upon the character of the operation involved. 


Conversion of bonds or notes.—For the conversion of 
bonds into other securities, 1/20 of 1 per cent of the par value 
of bonds or notes converted, with a minimum of $25 per 
annum, to start from the date of the first conversion. 


FEES 307 


Cremation.—For cremating bonds; interim or trust re- 
ceipts, and coupons, interest or dividend warrants: 


$15 per 1,000 bonds, etc., if sorted and listed by the trustee. 

$8 per 1,000 bonds, etc., if sorted and listed by the corporation. 

$8 per 1,000 coupons, etc., if sorted and listed by the trustee. 

$4 per 1,000 coupons, etc., if sorted and listed by the corporation. 

Minimum fee for a single cremation $10. 

Partial releases.—For each release of property, a minimum 
charge of $25, the exact charge being determined by the value 


of the property involved and the amount of work involved. 


Refunds of state taxes.—If the trustee is called upon to 
handle tax refunds there will be a special annual fee dependent 
upon the amount of work involved. 


Supplemental indentures.—For executing supplemental in- 
dentures, a fee by appraisal of the services rendered, with a 
minimum of $50 per indenture. 


Extraordinary services.— For performing any services not 
contemplated at the time of the execution of the indenture, 
a fee to be determined by appraisal in an amount to fit the 
service. 


Execution of satisfaction pieces.—For this service the 
exact charge depends on the value of final services rendered 
at the closing of the trust, the minimum fee being $25. 


Exchange of temporary for definitive securities as agent 
for another corporation Twenty cents for each bond de- 
livered, with a minimum of $50 for any one account. 


Trustee of foreign insurance companies.—For holding se- 
curities of such companies, an annual charge of 1/10 of 1 
per cent of the average principal amount held during the year. 


Industrial note issues.—For acting as Trustee or Registrar 
(as to issuance) of issues secured by large numbers of prom- 
issory notes, % of 1 per cent per annum of the total face 
amount of collateral received during each year. ‘This charge 
covers all services, including certification and delivery of 
bonds, payment of bonds and coupons, registration of bonds, 
custody and withdrawal of collateral, cremations, and all 
other services. 


Nore.—These fees do not include counsel fees nor any other expenses or dis- 
bursements which may be incurred on account of the obligor. 


308 WORK OF CORPORATE TRUST DEPARTMENTS 


Fiscal or Paying Agency Services under Foreign Corporation 
| or Foreign Governmental Issues. 


Authentications.—For countersignature of temporary re- 
ceipts or certificates and definitive bonds or notes, 50 cents 
per signature. 


Paying agent of coupons.— For acting as Paying Agent and 
Fiscal Agent of coupons or registered interest, 1% of 1 per 
cent of the interest moneys disbursed: minimum annual fee 
$10. 

For all other services, including the handling of the Sink- 
ing Fund, if any, optional redemptions, redemption at matur- 
ity, annual fees for ordinary services as Paying or Fiscal 
Agent, cremation services, etc., — per cent of the principal 
amount of bonds redeemed. (In the blank space there should 
be inserted the percentage of the principal amount of the 
issue which will be equivalent to the aggregate fees for the 
services included, at the rates given in the corporate trust 
schedule. ) 

Corporate Agencies. 


TRANSFER AGENT (STOCK) 


Minimum Charge (Per Annum). 


Charges are based on 
A. Number of accounts. 
B. Number of certificates. 
C. Number of agencies. 
For the issuance of 500 certificates and maintenance of 500 accounts, 


or any. part ‘thereoé? 00 i Wil Ak Wetnete nleteoe alae ae ee $500.00 
For issuance of additional certificates, each ..........ccceeceeececs 25 
For the maintenance of additional accounts, each ............eeeee. 50 
For furnishing reports of daily transfers to co-transfer agencies, 

additional charge per agency per annum .........0.e5e0nsesusen 200.00 
For each out-of-town certificate posted, debit or credit ............ 10 
For posting out certificates on the closing of a transfer agency or 

the retiring of stock — per:certificate ..... es sk. esren see tem aoe 12% 


STOCKHOLDERS’ LISTS 
One list is furnished without charge for each class of stock; for 
additional lists; for each 1,000 accounts fice ste. sleuin ieee 25.00 
For additional copies of lists, for each 1,000 accounts ............6- 12.50 


REGISTRAR (STOCK) 
Minimum Charge (Per Annum). 


For registration of 500 certificates .........c..eeeeees Lee sor eee $250.00 
For registering each certificate in excess of 500 ..........ecceceees Re 
For each co-registrar..in other cities) (ya ssi cs aioe asta cies ete ere 125.00 


For posting out certificates on the closing of a registrar agency or 
retiring of, stock, for each, certificate |... ss. ¢tekles s vey soles 07% 


FEES 309 


DIVIDEND DISBURSING AGENT 
For each dividend— 


Mate LIC TCC Wane PI cra 31d Hes sary) e910 Ghat BSP eT Ute hte alcatel ahh ae. 's 62.50 

Pea MERC MAUS CHOGRSS ci Wy tn o Nos. glen als io. 6 418 Che where MeN lave aie Hie Hl soe 100.00 

DARE ROUT CHECKS fitch Mannie tvne «Gi disbn Slave. Cie nein ine MEN AUeeMp ee aah ite thal 131.25 

Pes TLE SY UORCHERCKSU Rr I SoM co Al ed o.eg oi vial Uae it RRRBER MN RL aedly Moe ae lees 150.00 

Barrmmeach cuece Over 1,000 (415020 hak Sian eac’s w NSAID EITM Sruee Alo TAA x olga 124% 

SPECIAL WORK 

Forpacaressing eavelopes,. per: 1,000 oc ene. oe va knee ew} aiele ee ys 10.00 
For addressing envelopes, folding and inclosing one report or circular, 

including stamping envelopes, mailing, etc., per 1,000 ............. 20.00 
For addressing envelopes, folding and inclosing more than one enclos- 

ure, stamping envelopes, mailing, etc., per 1,000 ............... 25.00 


If duplicate names of holders of more than one class of stock are 
to be eliminated, an extra charge of 25 per cent should be made. 

For preparing and making certificates of distribution required by the 
Listing Committee of the Stock Exchange, $10 per 1,000 ledger 
sheets analyzed. 

Other special services by appraisal. 


Nore.—The cost of all stationery such as binders and ledger sheets, transfer 
and registration sheets, window receipts, checks, paper used for lists, etc., and 
disbursements, such as postage and insurance, are to be added to the regular 
charges for services as Transfer Agent or Registrar. 


Registrar and transfer agent of bonds.—For acting as Reg- 
istrar as to principal only, a minimum annual fee of $100 to 
cover the registration of 100 bonds; registrations in excess 
of 100 in any one year, 30 cents each. 

For acting as Registrar and Transfer Agent of issues reg- 
isterable as to principal and interest, a minimum annual fee of 
$150 to cover the registration of 150 bonds in any one year; 
registrations in excess of that number, 50 cents each. 

For furnishing reports of registrations to out-of-town 
agents, additional charge per agency per annum, $50. 


Paying agent of coupons or registered interest—4 of 1 
per cent of the interest moneys received, with the provision 
that no charge will be made if the Paying Agent is given 
thirty days free use of the interest moneys. ‘The minimum 
annual fee for this service is $10. 


Fiscal agent (making returns to the Collector of Internal 
Revenue).—1/16 of 1 per cent of the interest moneys re- 
ceived, in addition to the fee for disbursing interest. 

For acting both as paying agent and fiscal agent, the mini- 
mum fee is $25 per annum. 


310 WORK OF CORPORATE TRUST DEPARTMENTS 


Reorganization department fees.—In the arrangement of 
fees, the work of the reorganization department presents the 
greatest difficulty. One reorganization differs from another 
to such an extent that, in New York at least, no standard 
basis of charges has been adopted by the Corporate Fidu- 
ciaries Association. 

The rates mentioned below are gathered from a review 
of the fees charged by a New York trust company and are 
presented merely to give an idea of the factors entering into 
reorganization department fees and to give a suggestion of the 
rates applying to the various services. 

Deposit of securities: 


Bonds 1/16 per cent to 1/10 per cent of the principal amount. 
Stock — 5 cents per share. 


Issuance of certificates of deposit: 
Unlisted Certificates — 50 cents each. 
Listed Certificates, including exchange of temporary certificates of de- 
posit and reports to Stock Exchange — $1 each. 


Transfers of certificates of deposit: 
50 cents for each certificate issued. 


Delivery of new securities: 

1/10 per cent to 1/4 per cent of the principal amount. 

An additional charge may be made for the custody of the 
deposited securities (particularly if the reorganization ex- 
tends over a period of several years). If subdepositaries are 
appointed the main depositary usually charges a commission 
on the securities taken in by the subdepositaries. Mailing 
circulars and other special work for the committee also calls 
for an extra charge. 

As a matter of practice, it is almost impossible, in most 
reorganizations, to arrange a basis of charges until the re- 
organization is completed. ‘The amount is then largely a 
matter of negotiation between the committee and the deposi- 
tary; but, except under special circumstances, the basis out- 
lined above may fairly be used by the depositary in calculating 
the amount which it suggests as its fee. 

For services rendered by the reorganization department in 
connection with capital subscriptions, assuming that there are 
no unusual circumstances, probably a commission of 4% per 
cent on the amount of funds handled would be about the aver- 
age charge by New York trust companies, with an extra 
charge for transfers of subscription warrants of purchase 


FEES 311 


certificates. [he charge for services of this nature is fre- 
quently modified if the agent receives free use of the funds 
for a substantial period. 


ARRANGEMENT OF FEES 


ACCOUNT 


INDENTURE OR MORTGAGE DATED 


ACCEPTANCE 


CERTIFICATION 
TEMPORARY BONDS 
COUPONS 


REGISTERED 


ANNUAL FEE MONTH BILLED 


CREMATION 


BONDS 


COUPONS 


PAYMENT OR REDEMPTION 


BONDS 


COUPONS 


CONVERSION AGENT 


FISCAL AGENT 


Form 86.—Fee Basis. Sheet (Front). 


Rates in New York City.—It is but fair to point out that, 
generally speaking, the rates in New York City are lower 
than those in effect elsewhere in the country. This is to be 
expected as the volume of business in New York is still larger, 
by far, than in any other city. While for many years the 
volume of personal trusts in the larger cities such as Chicago, 
Philadelphia, Boston, St. Louis, Cleveland and San Francisco, 
has been considerable, it has been only of recent years that 


312 WORK OF CORPORATE TRUST DEPARTMENTS 


the trust companies and banks in these and other cities have 
come into real competition with the institutions of New York 
for the more important pieces of corporate trust and cor- 
porate agency business. - 


REGISTRATION 


S$ ‘PER ANNUM TO COVER REGISTRATIONS. EACH EXCESS IN ANY ONE YEAR 


PROPOSED SY 
REVISED BY 


ACCEPTED BY 


Form 86.—Fee Basis Sheet (Back). 


Fee records and billing.—Second in importance only to the 


charging of adequate fees comes the matter of recording and 
billing. The following records, in use by the corporate trust 
department of a large trust company, are typical of the fee 
records of all of its fiduciary departments. 

Form 86, known as the “‘fee basis sheet,” is prepared from 
the letter or official memoranda confirming the fee basis as 
arranged on each trust. It is inserted in the commission or 


9 


FEES 313 


fee ledger (next discussed) immediately preceding the ac- 
count of the trust to which it relates. 

Form 87, the “commission ledger’’ sheet, is largely self- 
explanatory. The entries in the debit column under “Com- 
missions’ are made from Form 89 as bills are rendered; the 


COMMISSION & DISBURSEMENT RECORD 


| a: _ COMMISSIONS } a; DISBURSEMENTS OR ADVANCES 
oR. cR BALANCE DR. cr... BALANCE 
ge i 


Form 87.—Commission Ledger. 


entries in the credit column are posted from the trust depart- 
ment cash tickets as remittances are received. Debit and 
credit entries under “‘Disbursements or Advances’”’ are made 
from cash tickets as payments for account of the trust are 
made by the trustee, or as remittances are received by the 
trustee in reimbursement therefor. Disbursements are car- 


ACCOUNT 


DATE & NO. DOCUMENT EXECUTED 


a 


. 


ren = 


Form 88.—Commission Work Sheet (Front). 


ried on the general books as Accounts Receivable and the 
trust department is required periodically to reconcile the total 
of its balances with the control account. Some trust com- 
panies follow the practice of carrying their outstanding bills 
as accounts receivable. Much may be said in favor of this 
practice, from an accounting point of view. If this is done, 


314 WORK OF CORPORATE TRUST DEPARTMENTS 


it is necessary to debit ‘‘Accounts Receivable” and make a 
corresponding credit to ‘“‘Commissions”’ as bills are rendered. 

Form 88 is the ‘‘work sheet” which is written up currently 
as services are rendered. ‘The information is obtained from 
several sources, principally: 


(a) The bond certification blotter. 

(b) The documents executed record, as to the execution of 
new trusts, releases, supplemental indentures, and other in- 
struments involving a charge. 

(c) The redemption record, in connection with the pay- 
ment or redemption of securities. 

(d) The commission ‘Tickler,” comprising cards indexed 
by date, for all services calling for annual or periodical 
charges. 

These records are described and illustrated in Chapter IV. 


, ACCOUNT 


CERTIFICATION AND DELIVERY PAYMENTS AND REDEMPTIONS 


3 BILLED 
EXCHANGE BOOK MATURITY PARTIAL 


RECORD OF Ss. F. 
REDEMPTION PURCHASES 


BONDS ISSUED $100. 


$500. $1,000. REDEMPTION 


| 


Form 88.—Commission Work Sheet (Back). 


Form 89 illustrates the bill used for fees. It is prepared 
in triplicate, the original and duplicate being forwarded with 
the request that the duplicate be returned with the remittance. 
The triplicate copy is retained in the trust department files. 

Form 90 is the ‘“‘disbursement voucher”’ retained as a re- 
ceipt for all payments made by the trust company for account 
of its corporate trusts. The amount of outstanding disburse- 
ments are, of course, added to any bill rendered. In addition 
to this, the commission clerk is required to examine the trial 
balance of the departmental disbursements monthly, and to 


FEES 315 


render bills for any sizable disbursements, where no commis- 
sions are billable within a reasonable time. 


BANKERS TRUST. 
| COMPANY _| 


1G WALL STREET, 
NEW YORK. 


Dear Sir 
We submit our bill for services as specified, and shall appreciate a remittance at 


your convenience. 
Very truly yours, 


N° 3086 


Assistant Secretary, 


Please return the duplicate of this bill with your remittance. Unless requested, no receipt, other than our endorsement on 
your check will be given 


Form 89.—Commission Bill. 


316 WORK OF CORPORATE TRUST DEPARTMENTS 


DISBURSEMENT VOUCHER 


CORPORATE TRUST DEPARTMENT 


New York, 


Ne 3114 


ENCLOSED FIND CHECK FROM BANKERS, TRUST COMPANY IN SETTLEMENT OF BILL ATTACHES: 


ACCOUNT { 


iS Se ee 
RECEIVED of the BANKERS, TRUST COMPANY, 16. Wall Street, New York City 


: Leon | ___DOLLARS, 
in full settlement of account stated above: 


KINDLY RECE/PT AND RETURN 


Form 90.—Disbursement Voucher. 


Transfer, registration and coupon department billing.— 
Similar records are maintained for other fiduciary depart- 
ments, except that the information for the purpose of billing 
is obtained from the appropriate records of the respective 
departments. In the case of transfers or registrations, the 
bills are rendered periodically, usually semiannually, the mini- 
mum annual charge being included in the first bill of each 
yearly period, and the charge for additional certificates being 
included in the second bill. 


For the purpose of keeping track of the number of cer- 
tificates issued by the transfer department, Form 91 is used. 
A sheet is opened for each account, or for each class of stock, 
if there is more than one. ‘The daily totals of certificates 
issued are entered on these sheets and, when bills are being 
prepared, the total shown on each sheet is proved against 
the number of certificates used as indicated on the transfer 


FEES 317 


8 
fy 
23 
a 
t 
: aRenOenna ott aay ee FEL 
3 
ee 


a 
t 
Opry ws Aas} os = ay © BEE EE = B B E E > E E EE — 
a =| EE QE N,N A NY Se Ny Ny om 
” 
o 


NEO sty nf ope] D1 Alo] —-| ala 
a) et KH Kf Kf HK KH KL aI NI NIN 


oo 
3 
so 
a 

4 


= 
oh 
a 
te 
; eal aiid aul 
‘| ba MYL OL RL] HALO] —] NI] sm] TIEN OLR] ODI] A] oO] —]| A] Al +] oH 
sa We ama (i ree) |(atbsapes| Lahasat Yetamarel [ecacead Vinal! (kin A Mas Co DROS WS) ears | BE a a 


iy TEMP Ol_e! ©] Ali oO] KT NI Al St] HW] oO] mI] DIL alo] —| al al = 
ALN NT ata 
= 2 
ote] NI at se] AI SC 
[a] fa] | NTE NP NT NT NS 


Form 91.—Stock Certificates Issued Sheet. 


Gr a EBEEB Sycol xT an] tI 4 Si Ss] eo] a SS 
ANA AV NA] ca] AL A] al al mm 


St] NIE mt et] a wl wo] Ola 


s 

ov oe te Roe 
ao 

SB 

C 


Sel BEEBE [a] 5] 8] NP wT woleolr ny eo aS Ss] — 
APN NERA NN ANN NE A os 


& 
Alalstpaulelelolalsixsi a} als] Ql el sel al els 
AQ NT A AL AT A AP A] A Mm] om 
8 
pa 
oi] 
e 
3 


ALA TI NP ore lTolalol] —I1 ani ati se] oi cl s&s] SI a] ol = 
Ce le ee ee ee ee oe i 2 od a Ei 8 od ad Maal 


record by the first and last certificate number for the period 
covered, less certificates spoiled by errors in preparation. A 
similar record is kept by the registration department. Entries 


318 WORK OF CORPORATE TRUST DEPARTMENTS 


as to the stockholders’ lists are made as the lists are supplied 
and the information necessary for bills as dividend disbursing 
agent is obtained from the dividend payment lists. “The cou- 
_ pon department also renders bills periodically, based on the 
amount of funds received to pay each coupon maturity. Care 
must be exercised not to bill corporations for the payment of 
coupons if the department has received free use of the funds 
for 30 days or such other period as may be specified in its 
arrangement with its principal. 


Disbursements.—It should be noted that expenses of the 
trust company, such as postage and registered mail insurance 
(except when collected from the addressee), telegrams, coun- 
sel fees, and so on, are chargeable to the company on whose 
behalf the expenses are incurred. In transfer and registration 
work the cost of sheets, binders, etc., are also charged against 
the principal, on the theory that they are the property of the 
principal and are merely in the custody of the agent who, at 
some future date, may be called upon to turn them over to 
another agent. Some satisfactory arrangement should be 
worked out between the fiduciary departments and the various 
service groups, purchasing, and other departments where these 
charges originate, so that all of these expenses eventually 
will be billed against the respective companies. 


BIBLIOGRAPHY 


Campbell, H. Brua, “Legal Aspects of the Transfer of Securities.” 
Doubleday Page & Co. 

Chamberlain, Lawrence, “Principles of Bond Investment.”’ 
Henry Holt & Co. 

Cushing, Harry A., “Voting Trusts.” 
The Macmillan Co. 

Dewing, Arthur S., ‘The Financial Policy of Corporations” 
(Volume I). Ronald Press. 

Duncan, Kenneth, “Equipment Obligations.” 
D. Appleton & Co. 


Gerstenberg, C. W., “Financial Organization and Management of 
Business.” 


Prentice-Hall, Inc. 


Herrick, Clay, “Trust Departments in Banks and Trust Companies.” 
McGraw-Hill Book Co., Inc. 

Jordan, D. F., “Investments.” 
Prentice-Hall, Inc. 

Lagerquist, W. E., “Investment Analysis.” 
The Macmillan Co. 

Lanier, H. W., “A Century of Banking in New York, 1822-1922.” 
George H. Doran Co. 

Lilly, William, “Individual and Corporation Mortgages.” 
Doubleday, Page & Co. 

Maraspin, F. L., and Driver, H. B., ‘““Fundamental Principles of Stock 
Transfers.” Boston Chapter, American Institute of Banking. 
Stetson, Byrne, Cravath, and others, “Some Legal Phases of Corporate 

Financing, Reorganization, and Regulation,” including 

(a) Francis Lynde Stetson, “Preparation of Corporate Bonds, 
Mortgages, Collateral Trusts and Debenture Indentures.”’ 

(b) James Byrne, “The Foreclosure of Railroad Mortgages in 
the United States Courts.” . 

(c) Paul D. Cravath, “The Reorganization of Corporations; 
Bondholders’ and Stockholders’ Protective Committee; Re- 
organization Committees; and the Voluntary Recapitalization 
of Corporations.” 

The Macmillan Co. 

Walker, Roberts, ““The Modern Corporate Mortgage,” a Lecture de- 
livered at Princeton University. Reprinted by New York Chap- 
ter, American Institute of Banking, Inc. 


319 


APPENDICES 


APPENDIX I 


Form of Corporate Mortgage 


er A 
\ N 


CONTENTS OF APPENDIX I 


PAGE 
[os Ce E80 ay ae RAT eR aa ty Fa MA lac eg SU A 353 
Authorization of indenture and issue of bonds ................. 333 
ET eCOUDOTE DONUS. nis fect re to ic hen UE de pid Cane hae ka eck 334 
PTC ETCOU DOT ie epee eR eee TNC, freuen che let Bette eae Mn, 335 
Forma registered bond without coupons... 2.6 iue oaks Hees 333 
Pe tere TUSLCO SY CONTLICALe vere eee hed eh oir ein dale aie es ealuiaeanona 337 
eT AVICCE WIC LAWS cst eek RRS CT eRe by ee Une ate 337 
SOE PU Ga tie) ES a a eae a CN a a yieky| 
Ce MOTTO tisea 1) ok eet ree Ree IR NS eee Sry eee hd 339 
RRPTOU MSE PSty terse apg Wise Meee Weare Rhee ei oi ta whine pote Serer 339 
Pee OTE OTOASA ICG re ten gies te a gratin la eh Ula hard aeouaile es 339 
If money deposited to pay bonds is not claimed within six years ... 340 


Article First. 
Form, Execution, Delivery, Registry and Exchange of Bonds. 


ee mee ONC eS IScUADIE TIMGSETICS |... odie je celelaiste C's ee ele ks 340 
’ Designation and terms of bonds of Series A ........ 340 
Section 2. Designation and terms of bonds of other series ...... 340 
Bere ee UTS OL Dots and COUPONS’ s. o.oo sce ele eb eacale s 341 
Execution, authentication and delivery of bonds .... 341 
PPreCUNGt Listes SICEITINICATE ou shai ge ARG os ae ak 341 
Signatures of former officers to continue valid ...... 341 
DL AMECE RNIMCOUOITSY Lis. cee alee tile gave & sfc ol aha aay 341 
‘Trustee to receive copy of resolution creating any series 342 
Date from which interest is to accrue .............. 342 
Bonds may be with or without coupons .......... 342 
Section 4. Denominations, etc., of coupon bonds ............0. 342 
Denominations of bonds without coupons .......... 342 
Section on Repistration atid transter books). 62 iGiyja. es ale ene 342 
Repistration Of COUPON DONS joe hula dines selene 342 
Transfer of registered coupon bonds .............. 342 
Bier otiabiityrorwcouponiss eee, Sa aad ae des cia wank 343 
Exchange of coupon bonds for coupon bonds of other 
PCOS A MONS ts Mier cart Bees laine Seti oe etal) 343 
Transfer of registered bonds without coupons ...... 343 
Exchange of registered bonds without coupons for 
BUR OISays tas novia ten eisai Cele Mates, kL. ay hhG 343 


326 


Section 


Section 


Section 


Section 
Section 
Section 


Section 


Section 


APPENDIX I 

PAGE 

Exchange of coupon bonds for registered bonds with- 
OUL COUPONS eee Ort leisy ietek state 343 

Legends on and provisions in coupon and registered 
Bonds eye eat Ree carte AN. Scr 344 
Charges’ for transfers-and exchanges. ...... )\sennes 344 
Cancellation ‘of: surrendered! (bonds)... a eee 344 
Who to be deemed owners of coupon bonds ........ 344 
——OF “COUDONS Ly aioe cia lausbene aiwie's Savers eis eve 6 sant 344 
—of bonds without coupons .............0eeeceee 344 
—of registered coupon bonds <0). 5... sa «ce eee 344 
Replacing bonds mutilated, destroyed or lost ........ 344 
Charges for issuing substitute bonds .............. 345 
‘Temporary; bonds ¢. 002.0208. os 0 sey as ee er 345 


Exchange of temporary bonds for definitive bonds .. 345 
Bonds may be authenticated before recording of mort- 


PAE. 2h oe tea ataen aie erate 6 teh gel aa et 345 


Article Second. 
Issue of Bonds. 


General power to issue bonds from time to time .... 345 


Immediate issue of ‘Series’ A |... 4.5 '. cscs esau ie 346 
Issue of bonds to refund, etc., bonds of other series .. 347 
Conditions of issue without deposit of cash ........ 347 
Conditions of issue with deposit of cash ........... 347 
Cancellation and return of bonds and coupons ...... 348 
Issue of bonds to retire underlying bonds .......... 348 
Issue of bonds against cash to retire underlying bonds 349 
Resolutions, etc., to be delivered to Trustee ........ 349 
Disposition of underlying bonds upon retirement .. 349 
Until default no interest to be paid .............. 349 


Upon payment of all underlying bonds of any issue, 
mortgage securing the same shall be discharged.. 350 


Future issues of bonds on account of additional prop- 


CITE V5 ole UAT UTC: Een 350 
Issue of bonds upon deposit’ of cash. 0... 0 ee 351 
Net earnings in excess of interest requirements ...... 351 
Copies of resolutions to be furnished to Trustee .... 351 
Certificates to be furnished to Trustee ............ 351 
Provisions) as to:real ‘estate )ia(iwaieueial.. .6 eee 352 
By whom certificates shall be signed .............. 352 


Authentication of bonds upon receipt of certificates, 


Cty ie BAe TU ai eanane LARP IST OOPS < 353 


Section 


Section 


Section 


Section 


Section 


Section 
Section 


Section 


Section 
Section 


4. 
ne 
6. 


— 
e 


CONTENTS OF APPENDIX I 327 


PAGE 

No bonds authenticated if “Telephone Company is in 
eT AUR Ay tok cee VES deeitic ole aha eee 558 
‘Trustee may rely on resolutions, certificates, etc. .... 353 
—miay make an independent investigation .......... 353 
—at the expense of the Telephone Company......... 354 


Article Third. 


Concerning Securities of Other Corporations. 


Securities subject to lien of indenture to be deposited 


AV TLE TCESPee Uo isa a lr.) AOR UE MMe ane wiceunds 354 
‘Trustee may preserve existence of company whose stock 

Egg rd Peta sal Rly, ey al tate LPR WP Uae eR 9 tn eae a 354 
STAY. Ua NV CC RCCLOES oe Mus chs set) Mm mua 354 
Until default Telephone Company is to receive divi- 

CEN GS ANGMNTETESE: eon enenue sites elas legiacaeh Mag eu eee 354 
Telephone Company not entitled to principal of 

len CEGUSeCHTities ingyen eA, aici aha Ys bie, 
TOT) LOLCADIEAL, CIStTIDULIONS. o)o.u.4(e9hos sche ts une oes 355 
mre TO Tat UGE PCA OTIC Sie icles. «sca eal ciel 8 side alee oe 305 
—nor to cash dividends on liquidation ............ S00) 
All coupons and indebtedness to be subject to mort- 

ee PAU eter oth AM Gite iiss Waite cians 355 
Any such moneys to be paid to Trustee ............ 356 
Application of moneys paid to Trustee ............ 356 
Until default Company may vote pledged stock ..... 356 
mELUSECE LONPIVELPEOXICS \. dole eislccee cele saan abies s 356 
HM tAtionio Olle VOL DOWEL) io. cbc os eel se eiglh as 356 
See Tee CHU 4c) he eo li BL a! ee UR A a 356 
hE DECTIC HNO PACING lel bir acane as Nee aah 5 Lames) dine gw 356 
——<furchase. MONCY MOTtPAGe 2... sass cd ee nen « 357 
Pledved bonds may be retunded i000 ce de cin es So, 
Refunding bonds to be pledged hereunder .......... 357 
Trustee may purchase at sale property of corporations 

whose securities are pledged ................ eee¥i 
Trustee may join in reorganization of corporation 

whose securities are pledged ................ 358 
Telephone Company will pay Trustee’s expenses under 

RECS ATC ON ih Ea tree ast onan cult ticlen 358 


Article Fourth. 
Sinking Fund. 


Sinminottunnd sore Denies yy nwo. Cat seal eau gde figs he 358 
MIN MAMAIUS FOL Other BeTIeS teh areas NU AUIS fis edn 309 


328 


Section 1. 


Section 2. 


Section 3. 


APPENDIX I 


Article Fifth. 
Redemption of Bonds. 


PAGE 
Redeniption’ of SeriesvAre. oan 2.) 359 
Redemption provisions to be expressed in bonds .... 359 
Redemption: dates saya cus os 6). sce als ote 9 360 
Publication ‘of /motice: BGs P6220. oa a ee 360 
—stating numbers of bonds to be redeemed ........ 360 


—notice to be mailed to holders of registered bonds .. 360 
Bonds drawn by lot if only part of a series redeemed.. 360 
Holder of bond without coupons to receive a new bond 


for the amount unredeemed ........ 4 vee 361 
No interest to accrue after redemption date ........ 361 
‘Trust to terminate on deposit of cash necessary to re- 

deem. all bondssec". eels was eas 361 
Redeemed bonds to be cancelled ................ 362 


Article Sixth. 


Particular Covenants of the Telephone Company. 


Section 1. 


Section 2 

Section 3. 

Section 4. 
5 


Section 


Section 
Section 


ape ek 


Section 8. 
Section 9. 
Section 10. 


Section 11. 


Section 1. 


Covenant, to pay principal and interest ............ 362 
Covenant not to extend or refund coupons ......... 362 
Covenant to keep Manhattan office ............... 362 
Covenant to give further assurances ..........5..05 362 
Covenant. as to title’ .:. Yo jtigrau ite ate 363 
Covenant not to create pnor jiens Vt. 5... eee 363 
—not to issue more underlying bonds ............. 363 
—not to extend underlying bonds ..........:..... 363 
—to pay interest thereon when due .............. 363 
Covenant 'to. pay taxes; etc. 0.0, a. sas se Ui oe 363 
Covenant not to permit lien hereof to be impaired ... 364 
—to keep mortgaged property in good order ........ 364 
—-to make renewals ..)0.0 ons be nee ee ba ld 364 
Covenant to insure property or adopt other method of 
protections a0) ee Fee ee 364 
‘To: pay. proceeds, to Trustee’... 2... 19. see 364 
Covenant to keep records of sales, etc., of bonds .... 365 
Covenant not to issue bonds except in accordance with 
MOTTPAGE lai ts cla eens Te nee a en 365 
Covenant to record, pay fees, ete. . 2... 61... ae 365 


Article Seventh. 
Consolidation, Merger and Purchase. 


Consolidation,, etc,,. not prohibited ; 4. .4...\.... ) See 365 
—provided successor assumes payment of bonds .. 366 


Section 


Section 


Section 


Section 


Section 
Section 
Section 
Section 
Section 
Section 
Section 


Section 


Section 


Section 


Section 


Section 


Se ee ae ee ae 


CONTENTS OF APPENDIX I 329 


PAGE 

Successor, upon executing an indenture ........... 366 

—may issue bonds hereunder ............+-060005 366 
Appropriate changes in phraseology of bonds to be 

jae Ta Lt Rea DEP Re Pop oa Ohaae Ra Pett in id ea a 367 

Trustee may rely on opinion of counsel ........... 367 


Consolidation, etc., of company whose stock is pledged 
—if with Telephone Company, stock to be surrendered 

eve Naliciacs: ot Qe ah eee MaAuM Abs Morn bantias 367 
—also the. bonds of $uch company (4). .4......../. 0. 367 


Term “Telephone Company” includes any successor . 368 
Article Eighth. 


Concerning the Property Mortgaged. 


Telephone Company to possess and operate mortgaged 


BLODCL ey UItHHCerath Bie Ae esha caw 8 Sie) gM se pe 368 
Disposal, etc., of mortgaged property without release. . 368 
RElCasesOlirea west ate ion selec ccm feu eae 369 
Relesses OF Otler DTOPCITy slave dlc nce aicisten ae bal edis 370 
BO capes Tae td eae eat So alt ey ROR ra Oa 371 
Perches stOCk, DOMES. CtCo ae beige oie vis eo Sieg ou 
Transfer of franchise. Liabilities of purchasers ..... 371 
Exercise of powers by receiver or Trustee .......... 372 


Article Ninth. 
Remedies of the Trustee and Bondholders. 


Subordination of lien of coupons or claims for interest 


FUNIeUOT exten Get iw Rind eee bos ole a 3/2 
PVENtS OMe aUle | Wao ra ee aes ofZ 
Upon default “Frusteesmay enter a eo B73 
eC OPEL ACE ee itentph tor nia rN a Hs one 4 373 
PA DDLICATION OF INCOME wy poe Mier ei hog 374 
Ei toPTiNt al NOt Uey ne wi de te tr dak., 374 
Poms SECTINIC Pali QUE ca eee Vaud J wikhw eee kim & 374 
Upon default Trustee may vote ‘yb stock and col- 

lectarlivideridswandh interest, uiie \ oarecpeata'e 6 4 374 
Upon default principal may be declared due ........ 375 
Bondholders may walve detault sities a Ck 375 
Restoration of parties to former position .......... 375 


Upon default Trustee may sell mortgaged property .. 376 
Or may commence judicial proceedings ............ 376 


330 


Section 6. 


a 


Section 


Section 8. 


Section 9. 
Section 10. 


Section 11. 


Section 12. 


Section 13. 


Section 14. 


Section 15. 


Section 16. 
Section 17. 
Section 18. 


Section 19. 
Section 20. 


Section 1. 
Section 2. 
Section 3. 


APPENDIX I 


PAGE 
Notite’ of Sales eG Ouee ait ane ou arene (0s 0 er Sf 
Adjournment of sale. is Wok < sins iy alate a ool B77 
Vesting title in purchaser ‘3/5 9k 6.2 seus 377 
Sale to divest all interest of Telephone Company .... 377 
Purchaser’s acquittance on payment .............. 378 
Principal ;due'on' salet 7 o.n aes 2 eek Se 378 
Application-ot proceeds: of sale ').).’.. Un. aa ee 378 
—-to payment of costs, expenses, etc. ...2..02.500un 378 
—to payment of principal and interest ............ 378 
—surplus to Telephone Company .....-......:4- 379 
Purchaser may apply bonds and matured coupons on 
purchase tprice; iso 379 
Waiver of stay or extension laws .)....). +a OY | 
Covenant to pay principal and interest on default .... 379 
Upon failure to pay, Trustee entitled to judgment .. 380 
Application of moneys collected by Trustee ........ 380 
Upon institution of judicial proceedings Trustee may 
ONCOL: ss es a's o's nels hee ay ee 381 
—and may have receiver appointed ............... 381 
Bondholders not to sue until application made to 
"Drustee. fo.ce sie cae ee ek ecm oats oe 381 
—nor until Trustee is indemnified ................ 381 
Trustee to act for equal benefit of all bondholders... 381 
Remedies are cumulative 027.000... o.). 7. ee 382 
No rights impaired by Trustee’s delay ............ 382 
‘Trustee may institute suits to prevent impairment of 
Lire) aia ia vege giake ela el itn arses pepe er 382 
Majority of any series may take action on default .... 382 
No liability of stockholders, ete:’).. 2. ...... eee 383 
Obligations of Telephone Company only .......... 383 


Article Tenth. 
Evidence of Rights of Bondholders. 


Instruments may be executed in concurrent writings.. 383 
Proot of execution (co tinei Se aaa he oe 383 
Proof of ownership of unregistered bonds .......... 384 
of ‘repistered bonds iauwente) Ain ha elac ke Cee 384 


Section 1. 


Section 2. 


Section 3. 


Section 4. 


Section 1. 


Section 2. 


CONTENTS OF APPENDIX I dol 


Article Eleventh. 


Concerning the Trustee. 


PAGE 
Trustee accepts trusts on conditions .............. 384 
—not required to record mortgage ..............-. 384 
—entitled to compensation and indemnity and prior 

henstherefor ani eat make ny ae ON iy: A 384 
—protected in acting upon instrument believed genuine 385 
—not answerable for acts of agents .............. 385 
—not required to act on default until notified and 

He (a Gln allake sta OR pa: aca haa DIR COND Ie iene Mn me ead MMe 385 
—may require submission of bonds ............... 385 
=-—tnay take opinion of counsel) i403 2500. eel re| 386 
—may employ agents, attorneys, etc. .............. 386 
—need not see to insurance or payment of taxes .... 386 
—moneys received to bear interest ..........00000. 386 
—recitals made by Telephone Company alone ...... 386 
—not responsible for validity or sufficiency of security 386 
Le AV DAMON OLUET csi a coy tious xj sistance os Oe deel tel che 386 
—not responsible for debts, etc. ...........020000. 386 
—may rely on certificate of officers of ‘Telephone Com- 

DMM UNE N ln ikea alti ik key 2 PSMA ene 387 
RSRIscee MTC LCSISTU sale N, ue iaik Mies alae aoatbie iets 387 
—may be removed by bondholders ............... 387 
PA POMELLEETIOOE SOE SUICCERSOL, nei d ais di ales oe blo daw urne 387 
ST VIUONCNOLUETS C20) lan ld Gu wane a a Vi Ley 387 
ee LelepiOnel COMPANY (de ead cue oe Caled com ae 387 
—publication of notice of appointment ............ 387 
DUCUESSON LOPE a AELlist, COM Pally oo es. Guhee oe dven s comtals 388 
muccessor by merger oriconsolidation wo.) ) 6) Wa eal 388 

Article Twelfth. 
Supplemental Indentures. 
Provision for supplemental indentures ............ 389 
—to convey additional property ................0.. 389 
—to state indebtedness of companies hereafter merged 389 
mee MIMIEALIONS Vc Vuicieialeta e eereinis cle & shale creole 389 
—to evidence succession to Telephone Company .... 389 


—to make provision as to questions arising hereunder. 389 
Trustee authorized to join in execution ..........++ 389 


332 


Section 


Section 


Section 
Section 
Section 


Section 


APPENDIX I 


Article Thirteenth. 
Miscellaneous Provisions. 

PAGE 

All covenants inure to successors of Telephone Com- 
DANY tus ee ce. ‘peice Valk Whar ste eRe ate ae eee 389 

No rights hereunder except to Telephone Company 
‘Trustee and’ bondholders) \Adiiiy. 2. Ps 390 
Execution ini counterpartsy eis ws oo os ee 390 
Marginal: notess fa. 0 ee 390 

Attorney to acknowledge indenture for “Telephone 
Om pariy Wie se esl ev eieun sd aie abe es ene 390 
Attorney to acknowledge indenture for Trustee .... 390 
PeStUIMONIUET is ok oul aece deeses are ke edge ik er 390 
Signatures? Worl cays nig ual Oe aa 391 


Acknowledoements'\.2)05 50s doiwly he discs 391 


‘THE TELEPHONE COMPANY OF AMERICA 


to NATIONAL IRust Company, Trustee 


FIRST AND REFUNDING MORTGAGE 
Dated, October 1, 1925 


This Indenture, dated the first day of October, 1925, but executed 
on the date recited at the end hereof, made by and between 


THE TELEPHONE COMPANY OF AMERICA, a corporation duly or- 
ganized and existing under the laws of the Commonwealth of Penn- 
sylvania (hereinafter called the ‘“Telephone Company”), party of the 
first part, and NATIONAL TRusT CoMPANY, a corporation duly organ- 
ized and existing under the laws of the State of New York (herein- 
after called the ‘“Trustee”), party of the second part, WITNESSETH: 


WHEREAS, the Telephone Company is authorized by law to borrow 
money, and to secure the payment of the same by mortgage on its 
property, real, personal, and mixed, and has, by votes of its Board of 
Directors and its stockholders, at meetings duly called and held in 
accordance with law, authorized the execution of this indenture, and 
the immediate issue thereunder of bonds, of the aggregate principal 
amount of twenty-five million dollars ($25,000,000), to be designated 
‘Twenty-Five Year First and Refunding Mortgage 5% Sinking Fund 
Gold Bonds Series A’’; and 


WHEREAS, subject to the provisions of Article First hereof, the text 
of the bonds (which may be issued in series and may be coupon bonds 
or registered bonds without coupons), and of the coupons to be attached 
to such thereof as may be coupon bonds, is to be substantially in the 
following form (the blanks to be appropriately filled), provided that, 
in the case of bonds issued hereunder, which shall be secured by a 
sinking fund or which shall be made redeemable before maturity, or 
convertible into capital stock, or in respect of which there are other 
covenants and provisions permitted by this indenture, there are to be 
inserted in such bonds paragraphs stating briefly such sinking fund 
provisions, reserved right of redemption, right of conversion, or other 
covenants or provisions, and in such coupons, appropriate phraseology; 
and such bonds are to have inserted therein such provisions as to ex- 
changeability, and are to bear such legends or indorsements as may be 


333 


334 APPENDIX I 


required by the rules of the New York Stock Exchange or to conform 
to usage: 
(Form of Coupon Bond)! 
No. — Series — —% No. — 
United States of America 
Commonwealth of Pennsylvania. 


THE TELEPHONE COMPANY OF 
AMERICA 


FIRST AND REFUNDING MorTGAGE GOLD Bonp, 
Due 


THE TELEPHONE COMPANY OF AMERICA (hereinafter called the “Telephone 
Company”), a corporation of the Commonwealth of Pennsylvania, for value 
received, hereby promises to, pay to bearer, or, if this bond be registered, 


to the registered holder thereof, on the day of , at the 
office or agency of the Telephone Company in the Borough of Manhattan, City 
of New York, Dollars in gold coin 


of the United States of America of or equivalent to the standard of weight 
and fineness existing on October 1, 1925, and to pay interest thereon from the 


date hereof at the rate of percent ( 9%) per annum, such interest 
to be payable at such office or agency, in like gold coin, semiannually, on the 
day of , and the day of in each year until the 


payment of said principal sum, but only upon the presentation and surrender 
of the interest coupons hereto annexed as they severally mature. 

This bond is one of a duly authorized issue of First and Refunding Mort- 
gage Gold Bonds of the Telephone Company, issued and to be issued under, 
and all equally secured by an indenture of trust, dated October 1, 1925, duly 
executed and delivered by the Telephone Company to National Trust Company, 
a corporation of the State of New York, as Trustee, to which indenture refer- 
ence is hereby made for a description of the properties and franchises mort- 
gaged, the nature and extent of the security, the rights of the holders of said 
bonds and of the Trustee in respect of such security, and the terms and condi- 
tions under which the bonds are issued and secured. As provided in said 
indenture, said bonds may be for various principal sums and are issuable in 
series, which different series may mature at different times, may bear interest 
at different rates and may otherwise vary as in said indenture provided. 


Series bonds, of which this is one, are known as the First and 
Refunding Mortgage Gold Bonds Series of the Telephone Company 
and are limited in the aggregate principal amount of $ , at any one 


time outstanding. 

In case an event of default, as defined in the said indenture, shall occur, 
the principal of this bond may become and be declared due and payable in the 
manner and with the effect provided in said indenture. 

This bond shall pass by delivery unless registered as to the principal thereof 
in the holders name at the office or agency of the Telephone Company in the 
Borough of Manhattan, City of New York, such registry being noted on the 
bond by the agent for such purpose of the Telephone Company, after which 
no transfer shall be valid unless made at said office or agency by the registered 
holder in person or by his attorney duly authorized in writing, and similarly 
noted on the bond; but thereafter it may be discharged from registry by being 


1 This is a skeleton form. For the form of Series ‘‘A’’ bond see page 79. 


FORM OF CORPORATE MORTGAGE 335 


transferred in like manner to bearer, and thereupon transferability by delivery 
shall be restored, and may again, from time to time, be registered or transferred 
to bearer as before. Such registration, however, shall not affect the negotiability 
of the coupons hereto annexed, which shall continue to be payable to bearer 
and transferable by delivery merely, and the payment thereof to bearer shall 
fully discharge the Telephone Company in respect of the interest therein 
mentioned, whether or not this bond be registered. 

No recourse shall be had for the payment of the principal of or the interest 
upon this bond, or for any claim based thereon, or in respect thereof, or of 
said indenture, against any incorporator, stockholder, officer or director of the 
Telephone Company, either directly or through the Telephone Company or 
through a receiver or trustee, whether by virtue of any statute or rule of law, 
or by the enforcement of any assessment or penalty or otherwise, all such liabil- 
ity being, by the acceptance hereof and as part of the consideration for the 
issue hereof, expressly released. 

This bond shall not become valid or obligatory for any purpose until it shall 
have been authenticated by the execution of the certificate, hereon indorsed, 
by the Trustee under said indenture. 

In Witness Whereof, The Telephone Company of America has caused 
these presents to be signed by its President or Vice President and its corporate 
seal to be hereunto affixed and attested by its Secretary or Assistant Secre- 
tary, and coupons for said interest bearing the engraved facsimile signature of 
its Treasurer to be attached hereto in the City of New York. Dated the 
day of 

THE TELEPHONE COMPANY OF AMERICA 


By 
Vice President. 
Attest: 


Secretary. 


(Form of Interest Coupon) 
No. — ¢$ — 

On the day of ; , THE TELEPHONE COMPANY OF AMER- 
ICA will pay to bearer at its office or agency in the Borough of Manhattan, 
City of New York, Dollars in gold 
coin of the United States, being six months’ interest then due on its First and 
Refunding Mortgage Gold Bond No. , Series 

Treasurer. 
(Form of Registered Bond Without Coupons) 

No. — Series — — % No. — 
UNITED STATES OF AMERICA 
COMMONWEALTH OF PENNSYLVANIA 
THE TELEPHONE COMPANY OF AMERICA 
FirsT AND REFUNDING MorTGAGE GOLD Bonps, 

Due 


THE TELEPHONE COMPANY OF AMERICA, (hereinafter called the “Telephone 
Company”) a corporation of the Commonwealth of Pennsylvania, for value 
received, hereby promises to pay to 
or registered assigns, on the day of , at the office or agency of 
the Telephone Company in the Borough of Manhattan, City of New York, 

dollars in gold coin of the United 


336 APPENDIX I 


States of America of or equivalent to the standard of weight and fineness 
existing on October 1, 1925, and to pay interest thereon at the rate of 

per cent ( 9%) per annum from the day of , 19° 3 such 
interest to be payable to the registered holder hereof at such office or agency 
in like gold coin semiannually on the day of and on the 

day of in each year until the payment of said principal sum. 

This bond is one of a duly authorized issue of First and Refunding Mort- 
gage Gold Bonds of the Telephone Company issued and to be issued under, 
and all equally secured by, an indenture of trust, dated October 1, 1925, duly 
executed and delivered by the Telephone Company to National Trust Company, 
a corporation of the State of New York, as Trustee, to which indenture refer- 
ence is hereby made for a description of the properties and franchises mort- 
gaged, the nature and extent of the security, the rights of the holders of said 
bonds and of the Trustee in respect of such security, and the terms and condi- 
tions under which the bonds are issued and secured. As provided in said 
indenture, said bonds may be for various principal sums and are issuable 
in series, which different series may mature at different times, may bear interest 
at different rates, and may otherwise vary as in said indenture provided. 
Series bonds, of which this is one, are known as the First and Refunding 
Mortgage Gold Bonds Series of the Telephone Company and are limited 
in the aggregate principal amount of $ at any one time outstanding. 

In case an event of default, as defined in the said indenture, shall occur, 
the principal of this bond may become and be declared due and payable in the 
manner and with the effect provided in said indenture. 

This bond is transferable by the registered holder hereof in person or by 
attorney duly authorized in writing, at the office or agency of the Telephone 
Company in the Borough of Manhattan, City of New York, upon surrender 
and cancellation of this bond, and upon any such transfer a new registered 
bond without coupons, of the same series, for the same aggregate principal 
amount, will be issued to the transferee in exchange therefor. 

No recourse shall be had for the payment of the principal of or the interest 
upon this bond, or for any claim based thereon, or in respect thereof, or of 
said indenture, against any incorporator, stockholder, officer or director of the 
Telephone Company, either directly or through the Telephone Company or 
through a receiver or trustee, whether by virtue of any statute or rule of law, 
or by the enforcement of any assessment or penalty or otherwise, all such 
liability being, by the acceptance hereof and as part of the consideration 
for the issue hereof, expressly released. 

This bond shall not become valid or obligatory for any purpose until it 
shall have been authenticated by the execution of the certificate hereon indorsed, 
by the Trustee under said indenture. 

In Witness Whereof, The Telephone Company of America has caused 
these presents to be signed by its President or Vice President and its corporate 
seal to be hereunto afhxed and attested by its Secretary or Assistant Secretary 
in the City of New York. 


Dated the day of 
THE TELEPHONE COMPANY OF AMERICA 
By 
Vice President. 
Attest: 


Secretary 


FORM OF CORPORATE MORTGAGE 337 


AND WHEREAS, on each of said coupon bonds and on each of said 
registered bonds without coupons, there is to be endorsed a certificate of 
the Trustee in the following form, to wit: 


(Form of Trustee’s Certificate) ~ 
This bond is one of the bonds, of the series designated therein, described in 
the within mentioned indenture. 
NATIONAL TRUST COMPANY, 
Trustee, 
By 
Asst. Secretary. 


Anp WHEREAS, all acts and things necessary to make said bonds 
when executed by the Telephone Company and authenticated by the 
‘Trustee, as in this indenture provided, valid, binding and legal obliga- 
tions of the Telephone Company and this indenture a valid mortgage 
or deed of trust to secure the payment of said bonds, have been per- 
formed, and the execution of this indenture has been in all respects 
duly authorized: 


Now, THEREFORE, in order to secure the payment of the principal 
and interest of all bonds issued and to be issued under this indenture, 
according to their tenor and effect and the terms of this indenture, 
and the performance of the covenants and obligations herein contained, 
and in consideration of the acceptance by the Trustee of the trusts 
hereby created, of the purchase and acceptance of the said bonds by 
the holders thereof, and of one dollar in hand paid by the Trustee to 
the Telephone Company, upon the execution and delivery of this inden- 
ture, receipt whereof is hereby acknowledged, the Telephone Company 
has granted, bargained, sold, conveyed, released, confirmed, pledged, 
assigned, transferred and set over, and by these presents does grant, 
bargain, sell, convey, release, confirm, pledge, assign, transfer and set 
over unto National Trust Company, as Trustee, and to its successors 
in said Trust and its and their assigns forever, subject to the terms 
of this indenture, all and singular the following described property, 
rights, privileges and franchises of the Telephone Company, viz.: 

Any and all real estate which the Telephone Company now owns, 
or in which it has any interest, to be more fully described in a supple- 
mental indenture to be executed by the Telephone Company to the 
Trustee, or which it may hereafter acquire, in the Commonwealth of 
Pennsylvania. 

Together with all plants, buildings, structures, improvements, and 
machinery located upon said real estate or any portion thereof, and 
all rights, privileges, and easements of every kind and nature appurte- 
nant thereto, and all and singular the tenements, hereditaments, and 
appurtenances belonging to the real estate or any part thereof herein- 
before described or referred to or intended so to be, or in any wise 


338 APPENDIX I 


appertaining thereto, and the reversions, remainders, rents, issues and 
profits thereof; also all the estate, right, title, interest, property, pos- 
session, claim and demand whatsoever, as well in law as in equity of 
the Telephone Company, of, in and to the same and any and every 
part thereof, with the appurtenances. 


Also all buildings, plants, systems, works, improvements, structures, 
fixtures, appliances, machinery, materials, supplies, tools, implements, 
ofice furniture, telephone and telegraph lines, switchboards, wires, 
cables, poles, conductors, subways, conduits, stations, sub-stations, equip- 
ment (central office, subscribers’ stations and general), instruments, 
house wiring connections, and all appliances, apparatus, fixtures, fittings 
and equipment of every nature and kind whatsoever, appertaining to 
or useful in the transaction of the telephone or telegraph business in 
the Commonwealth of Pennsylvania, which the Telephone Company 
now owns or in which it has any interest, or which it may hereafter 
acquire, in said Commonwealth. : 


Also all rights of way, franchises, ordinances, privileges, immunities, 
consents, permissions, leases, patents, patent-rights, licenses, license agree- 
ments and other rights, privileges, contracts and agreements appertain- 
ing to or useful in the transaction of the telephone or telegraph business 
in the Commonwealth of Pennsylvania, which the Telephone Company 
now owns or in which it has any interest, or which it may hereafter 
acquire, in said Commonwealth. 


Also any stocks, bonds, or other obligations of other corporations which 
the Telephone Company may hereafter deposit with the Trustee (ac- 
companied in the case of certificates of stock and of bonds if registered, 
by irrevocable powers of attorney sufficient to enable the Trustee to 
make transfers thereof), as provided in Article Third of this indenture. 


Also all other property, real and personal, which the Telephone Com- 
pany now owns or in which it has any interest, or which it may hereafter 
acquire, in the Commonwealth of Pennsylvania, of whatever kind or 
description appertaining to or useful in the transaction of the telephone 
or telegraph business in said Commonwealth. 


Also all tolls, incomes, rents, issues, profits, benefits and advantages 
to be derived, received or had, of and from the property hereby mort- 
gaged or pledged or intended so to be, which the Telephone Company 
now owns, or in which it has any interest, or which it may hereafter ac- 
quire, in the Commonwealth of Pennsylvania. 


It is the intention and it is hereby agreed that all property of the kind 
hereinbefore described, in the Commonwealth of Pennsylvania, acquired ° 
by the Telephone Company after the date hereof, shall be as fully em- 
braced within the provisions of this indenture, and subject to the lien 
hereby created, as if the said property were now owned by the Telephone 
Company, and were specifically described herein and conveyed hereby: 


FORM OF CORPORATE MORTGAGE 339 


Provided, nevertheless, that no stocks, bonds, or other obligations of other 
corporations, shall be or become subject to the lien of this indenture, 
unless the same shall be deposited with the Trustee by the Telephone 
Company as provided in this indenture.’ 


Certain of said property, rights, privileges, and franchises, are con- 
veyed subject to the lien of the following mortgage: 

Tue Home District TELEPHONE CoMPANY to Ciry TRusT Com- 
PANY, Irustee, dated November 29, 1918, under which First Mortgage 
5% Gold Bonds, due December 1, 1948, of an aggregate face value of 
$9,543,000 are outstanding. 


‘TO HAVE AND TO HOLD all and singular the property, rights, privileges 
and franchises hereby conveyed and assigned, or intended so to be, to- 
gether with all and singular the reversions, remainders, revenues, in- 
comes, issues and profits, privileges and appurtenances, now or hereafter 
belonging or in anywise appertaining thereto, unto the [rustee and its 
successors in the trust hereby created and its and their assigns, forever. 

BUT IN TRUST NEVERTHELESS for the equal pro-rata benefit and secu- 
rity of each and every the persons and corporations who may be or become 
the holders of the bonds and coupons hereby secured, without preference, 
priority or distinction, except as provided in Section 1 of Article Ninth 
hereof, as to the lien or otherwise of one bond over or from the others 
by reason of priority in the issue or negotiation thereof, or by reason of 
the date of maturity thereof; so that each and all of said bonds shall have 
the same right, lien and privilege under this indenture and shall be 
equally secured hereby, with the same effect as if the same had all been 
made, issued and negotiated simultaneously on the date hereof; provided, 
nevertheless, and these presents are upon the express condition, that, if 
the Telephone Company, its successors or assigns, shall well and truly 
pay or cause to be paid the principal of said bonds, with interest and 
premium if any, according to the true intent and meaning of the said 
bonds and each of them, or shall provide for the payment of such bonds 
and interest and premium, if any, by depositing with the Trustee the 
entire amount due thereon, and shall also pay or cause to be paid all 
other sums payable hereunder by the Telephone Company, then this grant 
and mortgage shall become void, and the Trustee or its successors in the 
trust, on payment of all lawful charges and disbursements then unpaid, 
on demand of the Telephone Company shall execute, acknowledge and 
deliver to the Telephone Company such instrument of satisfaction or 
other deed of release or conveyance as may be necessary or proper to 
discharge this indenture of record, and shall grant, reassign and deliver 
to the Telephone Company, its successors or assigns, all and singular the 


2A detailed description of the properties was included in a separate inden- 
ture (see Article Sixth, Section 3, page 362). 


340 APPENDIX I 


Article First, Sections 1 and 2 

property, rights, privileges and franchises hereby granted, conveyed and 
assigned and not previously disposed of as herein provided, otherwise 
this grant and mortgage shall be and remain in full force. 

In case the owner of any outstanding bonds and unpaid coupons shall 
not, within six years after such deposit, claim the amount deposited as 
above stated for payment thereof, the Trustee shall, upon demand, pay 
over to the Telephone Company such amount so deposited and the 
Trustee shall thereupon be relieved from all responsibility to the holder 
or holders of any such bonds. 


THIS INDENTURE FURTHER WITNESSETH, that the Telephone Com- 
pany has agreed and covenanted, and hereby does agree and covenant 
with the Trustee and with the respective holders from time to time 
of said bonds or coupons, or any thereof, as follows, that is to say: 


ARTICLE FIRST 
Form, Execution, Delivery, Registry, and Exchange of Bonds 


Section 1. Bonds may be issued in series. Bonds of each series shall 
be designated by a distinctive letter. All bonds of the same series 
shall be identical in tenor, except as to the denominations thereof, and 
except, in the case of registered bonds without coupons, as to the date 
specified therein from which interest is to accrue. All of the bonds of 
a particular series shall bear the same date. All bonds issued under 
this indenture shall mature not before October 1, 1950, and not later 
than October 1, 2025. 

The bonds of Series A shall be designated ‘“I‘wenty-Five Year First 
and Refunding Mortgage 5% Sinking Fund Gold Bonds Series A.” 
All coupon bonds of Series A shall be dated October 1, 1925, and all 
bonds of Series A shall bear interest payable on April 1 and October 1 
in each year at the rate of 5% per annum from such date, without de- 
duction on account of any and all taxes imposed by the Commonwealth 
of Pennsylvania upon any such bond or upon the holder as a resident 
thereof, not in excess of four mills per annum on each dollar of the 
principal amount of such bond, and shall mature on October 1, 1950. 
They shall be redeemable at the option of the Telephone Company, 
upon the terms stated in Article Fifth hereof, and shall be secured by a 
sinking fund, as provided in Article Fourth hereof. 

Section 2. “The bonds of each series, other than Series A, shall be 
designated in such appropriate manner as shall be determined by vote 
of the Board of Directors of the Telephone Company. ‘The terms of 
the bonds of each series, other than Series A, including the maximum 
principal amount of bonds which may be issued in the series, date of 
the bonds, date of maturity, rate of interest, semi-annual interest pay- 
ment dates, exchangeability, provisions relating to conversion into the 


FORM OF CORPORATE MORTGAGE 341 


Article First, Section 3 
capital stock of the Telephone Company, or of a successor corporation, 
to a sinking fund, to redemption and to payment without deduction 
for certain taxes shall be such, not inconsistent with the terms of this 
indenture, as may be fixed by the Board of Directors of the Telephone 
Company and as shall be expressed in said bonds. 

Section 3. Bonds of all series, and the coupons to be attached to 
coupon bonds, shall be substantially in the forms hereinbefore set forth, 
with such omissions, variations or insertions as may be necessary or ap- 
propriate to make them conform to provisions authorized in respect of 
the bonds of any series by the Board of Directors of the Telephone 
Company and permitted by this indenture. 

All bonds issued under this indenture shall, from time to time, be 
executed on behalf of the Telephone Company by its President, or a 
Vice-President, under its corporate seal attested by its Secretary or an 
Assistant Secretary, and shall be delivered to the Trustee for authen- 
tication by it; and thereupon, as provided in this indenture and not 
otherwise, the Trustee shall authenticate and shall deliver the same. 
Only such bonds as shall bear thereon endorsed a certificate of authen- 
tication substantially in the form hereinbefore recited, executed by the 
Trustee, shall be secured by this indenture or be entitled to any right 
or benefit hereunder, and such authentication by the Trustee upon any 
such bond shall be conclusive evidence that the bond so authenticated, 
when issued by the Telephone Company, has been duly issued here- 
under and that the holder thereof is entitled to the benefit of the trusts 
hereby created. 

In case any of the officers of the Telephone Company who shall have 
signed and sealed any of the bonds issuable under this indenture shall 
have ceased to be officers of the T’elephone Company before the bonds so 
signed and sealed shall have been actually authenticated and delivered 
by the Trustee, such bonds, nevertheless, may be authenticated and 
delivered and issued as though the persons who signed and sealed such 
bonds had not ceased to be officers of the Telephone Company; and 
also any of such bonds may be signed and sealed in behalf of the Tele- 
phone Company by such persons as at the actual date of the execution 
of such bonds shall be the proper officers of the Telephone Company, 
although at the date of such bond any such person shall not have been 
an ofhcer of the Telephone Company. ‘The coupons to be attached to 
coupon bonds shall be authenticated by the engraved facsimile signa- 
ture of the present Treasurer or of any future Treasurer of the Tele- 
phone Company, and the Telephone Company may adopt and use for 
that purpose the facsimile signature of any person who shall have been 
such Treasurer, notwithstanding the fact that he may have ceased to 
be such Treasurer at the time when such bonds shall be actually au- 
thenticated and delivered. 


342 APPENDIX I 


Article First, Sections 4 and 5. 
Before bonds of any series shall be authenticated or delivered by the 


Trustee, a copy of the resolution of the Board of Directors of the 
Telephone Company, certified under its corporate seal by its Secretary 
or Assistant Secretary, authorizing or creating such series, shall be 
delivered to the Trustee, and the bonds of such series shall conform to 
the terms expressed in such resolution. 

Coupon bonds shall bear interest from their date. Registered bonds 
without coupons shall bear interest from the interest payment date 
next preceding the date of authentication, unless such date of authenti- 
cation be an interest payment date, in which case such bonds shall bear 
interest from such interest payment date. 

Bonds may be issued originally either as coupon bonds or as regis- 
tered bonds without coupons. “The ‘Trustee shall not authenticate or 
deliver any coupon bond unless all coupons thereon then matured shall 
have been detached and cancelled. 

Section 4. Coupon bonds of Series A shall be of the denominations 
of $1,000, $500, and $100. Coupon bonds of each other series shall 
be of such denominations as the Board of Directors of the Telephone 
Company may determine. Coupon bonds of the several denominations 
shall each be identified by a distinctive number and letter or letters, in 
accordance with such plan as may be adopted by the Telephone Com- 
pany with the approval of the Trustee. 

Registered bonds without coupons of Series A shall be of the denom- 
inations of $1,000, $5,000, and $10,000, and of other series, of such 
denominations as the Board of Directors of the Telephone Company 
shall determine. 

Section 5. The Telephone Company shall keep at an office or agency 
to be maintained by it in the Borough of Manhattan, City of New 
York, books for the registry and transfer, as in this indenture provided, 
of bonds issued hereunder. 

Any coupon bond may be registered as to principal only on the said 
books of the Telephone Company at its said office or agency and after’ 
such registration no transfer shall be valid unless made on said books ° 
by the registered holder in person, or by his attorney duly authorized, 
and similarly noted on the bond. Upon presentation to the Telephone 
Company at such office or agency of any such coupon bond registered 
as to principal, accompanied by a written instrument of transfer, in a 
form approved by the Telephone Company, executed by the registered 
holder, such bond shall be transferred upon such books. ‘The registered 
holder of any such coupon bond, registered as to principal, shall also 
have the right to cause the same to be registered as payable to bearer, 
in which case transferability by delivery shall be restored, and there- 
after the principal of such bond when due shall be payable to the per- 
son presenting the bond; but any such bond registered as payable to 


FORM OF CORPORATE MORTGAGE 343 


Article First, Section 5. 
bearer may be registered again in the name of the holder with the same 
effect as the first registration thereof. Successive registrations and trans- 
fers as aforesaid may be made from time to time as desired. Each regis- 
tration of a bond shall be noted thereon by the agent for such purpose: 
of the Telephone Company. Registration of any of the coupon bonds 
as to principal, however, shall not affect the negotiability of the coupons 
appertaining to such bond, but every such coupon shall continue to pass 
by delivery merely and shall remain payable to bearer. 

Whenever any coupon bond or bonds of the same series, by the terms 
thereof exchangeable for coupon bonds of the same series of other de- 
nominations, together with all unmatured coupons thereto appertaining, 
shall be surrendered to the Telephone Company for exchange for a 
like principal amount of coupon bonds of other denominations of the 
same series, the ‘Telephone Company shall execute, and the Trustee shall 
authenticate, and it or the Telephone Company shall deliver in exchange 
therefor a like aggregate principal amount of coupon bonds of the same 
series of such other denominations as shall be designated in the bonds 
so surrendered, bearing all unmatured coupons. 

Whenever the registered holder of any registered bond without cou- 
pons shall surrender the same to the Telephone Company for transfer, 
together with a written instrument of transfer in form approved by the 
the Telephone Company duly executed by such registered holder, the 
Telephone Company shall execute, and the Trustee shall authenticate, 
and it or the Telephone Company shall deliver in exchange therefor a 
new registered bond without coupons, or new registered bonds without 
coupons, of the same series, for the same aggregate principal amount. 

Whenever any registered bond without coupons, by the terms thereof 
exchangeable for a coupon bond or coupon bonds of the same series, 
together with a written instrument of transfer in form approved by 
the Telephone Company duly executed by the registered holder, shall 
be surrendered to the Telephone Company for exchange for one or more 
coupon bonds of the same series, the Telephone Company shall execute, 
and the Trustee shall authenticate, and it or the Telephone Company 
shall deliver in exchange therefor a like aggregate principal amount of 
coupon bonds of the same series as the surrendered bond, of such de- 
nominations as shall be designated in the bond so surrendered, bearing 
all unmatured coupons. 

Whenever any coupon bond or bonds of the same series, by the terms 
thereof exchangeable for a registered bond or registered bonds without 
coupons, together with all unmatured coupons thereto appertaining, 
shall be surrendered for exchange for a registered bond or registered 
bonds without coupons, the Telephone Company shall execute, and the 
Trustee shall authenticate, and it or the Telephone Company shall de- 
liver in exchange therefor a registered bond without coupons, or regis- 


344 APPENDIX I 


Article First, Sections 6 and 7. 
tered bonds without coupons, of the same series, for the same aggregate 
principal amount. 

Each coupon bond, and each registered bond without coupons, shall 
contain such provisions and bear such legends relating to exchange- 
ability as may be required to comply with the rules of the New York 
Stock Exchange or to conform to usage. 

For any exchange of bonds for bonds of another denomination, or of 
coupon bonds for registered bonds without coupons, or of registered 
bonds without coupons for coupon bonds, and for any transfer of regis- 
tered bonds without coupons, the Telephone Company, at its option, 
may require the payment of a sum sufficient to reimburse it for any 
stamp tax or other governmental charge, and in addition thereto of a 
further sum of not exceeding two dollars for each new bond, if any, 
issued upon such transfer or exchange. In every case of such transfer 
or exchange the Trustee forthwith shall cancel the surrendered bond 
or bonds and coupons, and upon demand shall deliver the same to the 
Telephone Company. 

Section 6. The Telephone Company and the Trustee may deem and 
treat the bearer of any coupon bond hereby secured which shall not at 
the time be registered as hereinbefore provided, and the bearer of any 
coupons for interest on any bond, whether or not such bond shall be 
registered, as the absolute owner of such bond or coupons, as the case 
may be, for the purpose of receiving payment thereof and for all other 
purposes, and neither the Telephone Company nor the Trustee shall 
be affected by any notice to the contrary. 

The Telephone Company and the Trustee shall deem and treat the 
person in whose name any registered bond without coupons issued here- 
under shall be registered as hereinbefore provided, as the absolute owner 
of such bond for the purpose of receiving payment of or on account of 
the principal and interest on such bond and for all other purposes, and 
shall deem and treat the person in whose name any coupon bonds shall 
be so registered as the absolute owner thereof for the purpose of re- 
ceiving payment of or on account of the principal thereof, and for all 
other purposes except to receive payment of interest represented by out- 
standing coupons. 

Section 7. In case any bond issued under this indenture shall become 
mutilated or be destroyed, lost or stolen, the Telephone Company in 
its discretion may issue, and thereupon the Trustee shall authenticate 
and deliver, a new bond of like tenor, date and series bearing in the 
case of a coupon bond, the same coupons as the one mutilated, destroyed, 
lost or stolen, and in the case of a registered bond without coupons, 
having endorsed thereon the same serial number or numbers of coupon 
bonds as were endorsed upon the bond so mutilated, destroyed, lost or 
stolen. ‘The applicant for such substitute bond shall furnish to the 


FORM OF CORPORATE MORTGAGE 345 


Article First, Section 8; Article Second, Section 1. 
Telephone Company and to the Trustee evidence to their satisfaction, 
respectively, of the mutilation, destruction, loss or theft of such bond, 
and said applicant also shall furnish such indemnity to both the Tele- 
phone Company and the Trustee, respectively, as in their discretion they 
may require. The Telephone Company may require the payment of all 
expenses of itself or of the trustee in connection with any such applica- 
tion, and of a sum not exceeding two dollars for each new bond issued 
under this Section. 

Section 8. Until definitive bonds shall be prepared the Telephone 
Company may execute and upon the request of the Telephone Com- 
pany the Trustee shall authenticate and deliver in lieu of such definitive 
bonds and subject to the same provisions, limitations and conditions, 
temporary printed bonds of any denomination substantially of the tenor 
of the bonds hereinbefore recited, with or without coupons and with 
appropriate omissions, insertions and variations as may be required. 
Pending the preparation of the definitive bonds, such temporary bonds 
shall be exchangeable for other temporary bonds of like aggregate prin- 
cipal amount, whether of the same or different denominations, in ac- 
cordance with the provisions of this Article First. 

Upon surrender of such temporary bonds, or any of them in exchange 
for definitive bonds, the Telephone Company, at its own expense, shall 
prepare and execute and, upon cancellation of such surrendered bonds, 
the Trustee shall authenticate and deliver in exchange therefor, defin- 
itive bonds for the same aggregate principal amount as the temporary 
bonds surrendered, and otherwise in accordance with said temporary 
bonds. Until so exchanged, the temporary bonds in all respects shall 
be entitled to the same lien and security of this indenture as the defin- 
itive bonds issued and authenticated hereunder, and interest, when and 
as payable, shall be paid and such payment noted thereon, if such 
temporary bonds shall have been issued without coupons, or, if such 
temporary bonds shall have been issued with coupons, shall be paid on 
presentation and surrender of such coupons as they mature. 

On request of the Telephone Company bonds shall be authenticated 
and shall be delivered hereunder in advance of the recording of this 
indenture, but the Telephone Company with all convenient speed shall 
cause this indenture to be recorded as a mortgage in every county of the 
Commonwealth of Pennsylvania. 


ARTICLE SECOND 
Issue of Bonds. 

Section 1. The Telephone Company may from time to time, sub- 
ject only to the conditions prescribed in this Article Second, issue bonds 
secured by this indenture without limit as to principal amount; provided 
that no bonds shall be issued under this indenture which will make the 


346 APPENDIX I 


Article Second, Section 2. 

total bonded debt of the ‘Telephone Company then outstanding (includ- 
ing in the term “total bonded debt” bonds, if any, of ‘The Home Dis- 
trict Telephone Company and bonds created by others than the Tele- 
phone Company secured by lien upon the property of the Telephone 
Company, at the time outstanding, but excluding all bonds to be re- 
funded, paid, redeemed, retired, purchased or otherwise acquired by 
the issue of bonds under this indenture,) exceed (a) the sum of the 
aggregate par value of the fully paid capital stock of the Telephone 
Company then outstanding, plus the amount of its surplus not specifically 
appropriated for any special purpose by vote of its Board of Directors 
or Executive Committee, or (b) the authorized indebtedness of the 
Telephone Company at the time. Such power to issue bonds shall not 
be exhausted by any issue, but may be exercised from time to time 
whenever the amount of bonds outstanding hereunder does not exceed 
the limits prescribed in this Article Second; and this indenture shall be 
a continuing lien to secure the payment of the principal and interest 
of all bonds which may from time to time be outstanding hereunder. 

Whenever requesting the authentication of any bonds, except those 
of Series A, under this indenture, the ‘Telephone Company shall furnish 
to the Trustee, in addition to other papers required by this Article 
Second, (a) an opinion of its counsel as to whether the consent or ap- 
proval of any public service or public utility commission or other pub- 
lic authority is required by law for the issue of such bonds, (b) a certi- 
fied copy of the order or other writing evidencing each such consent or 
approval as may be shown by said opinion to be required by law, (c) 
a certificate signed by its President or a Vice President and its Treas- 
urer or an Assistant Treasurer that by the issue of said bonds the limits 
prescribed by this Section 1 of Article Second will not be exceeded, 
and setting forth in reasonable detail the amount of such capital stock, 
surplus and total bonded indebtedness, and (d) as long as any bonds 
of Series A are outstanding, a certificate signed by its President or a 
Vice President and its Treasurer or chief accounting officer, that the 
net earnings of the Telephone Company have been sufficient to comply 
with the terms of paragraph (2) of Section 5 of this Article Second; 
provided that for the purpose of determining whether such net earnings 
have been so sufficient, interest payable upon any bonds to be refunded, 
paid, redeemed, retired, purchased or otherwise acquired shall be ex- 
cluded. 

Section 2. The initial issue of bonds hereunder, designated as 
“Twenty-Five Year First and Refunding Mortgage 5% Sinking Fund 
Gold Bonds Series A,” shall be limited to the aggregate principal amount 
of twenty-five million dollars ($25,000,000). ‘The bonds of said Series 
A shall be forthwith executed by the Telephone Company and delivered 
to the Trustee, and the Trustee shall thereupon authenticate and deliver 


FORM OF CORPORATE MORTGAGE 347 


Article Second, Section 3. 
said bonds to, or upon the written order of, the Telephone Company, 
and said bonds, or their proceeds, may be used by the Telephone Com- 
pany without restriction imposed by this indenture. 

Section 3. Additional bonds secured by this indenture may from time 
to time be issued hereunder, to refund, or retire, or replace, either 
before, at or after maturity, any bonds of Series A or any other bonds 
issued hereunder, upon compliance with the conditions prescribed in 
either paragraph (1) or (2) of this Section 3 of Article Second. 

(1) Upon (a) delivery to the Trustee of any bonds issued hereunder, 
whether of the same or different series, canceled or uncanceled, with 
all unmatured coupons, if any, thereto appertaining, either in bearer 
form or accompanied by proper instruments of assignment and transfer, 
and/or (b) upon proof furnished to the Trustee, satisfactory to the 
‘Trustee, that any such bonds have been paid and satisfied in full, and/or 
(c) upon acquisition by the Trustee of any such bonds as a part of the 
sinking fund established therefor, except bonds of Series A or of any 
other series in respect of which the sinking fund provisions prohibit it, 
the Trustee shall, upon request of the Telephone Company, at any time 
or times thereafter, authenticate and deliver to, or upon the written 
order of, the Telephone Company, bonds of such other series as may 
be requested by the Telephone Company, equal in principal amount to 
the principal amount of the bonds so delivered to the Trustee, and/or 
of the bonds so proved to have been paid and satisfied, and/or of the 
bond so acquired for sinking fund purposes, as the case may be; provided 
that the Trustee shall have been furnished with a certified copy of a 
resolution of the Board of Directors of the Telephone Company, re- 
questing the authentication and delivery of such bonds, 

(2) Upon delivery to the Trustee (a) of a certified copy of a resolu- 
tion of the Board of Directors of the Telephone Company, requesting 
the Trustee to authenticate and deliver to, or upon the written order of, 
the Telephone Company, bonds of a particular series, secured by this 
indenture, for the purpose of refunding at maturity any bonds, whether 
of the same or different series, issued hereunder, and/or for the pur- 
pose of redeeming any such bonds that shall have been called for re- 
demption according to their terms, and (b) in the case of bonds called 
for redemption, also a certified copy of the resolution authorizing such 
call, the Trustee shall authenticate and deliver to, or upon the written 
order of, the Telephone Company, bonds of such other series as may be 
requested by it, equal in principal amount to the aggregate principal 
amount of the bonds to be refunded and/or redeemed; provided that 
cash equal to the principal amount of the bonds so authenticated and 
delivered shall simultaneously be deposited with the Trustee in exchange 
therefor. On the written order of the Telephone Company, and upon 
delivery to the Trustee from time to time of bonds so matured or matur- 


348 APPENDIX I 


Article Second, Section 4. 

ing or so called for redemption (other than bonds in exchange for which 
the Trustee shall have authenticated and delivered bonds under para- 
graph (1) of this Section 3 of Article Second), canceled or uncanceled, 
with all unmatured coupons, if any, thereto appertaining, either in 
bearer form or accompanied by proper instruments of assignment and 
transfer, the Trustee, out of the cash so deposited with it, shall pay to 
the Telephone Company a sum equal to the principal amount of the 
bonds so delivered to the Trustee. 

All bonds and coupons delivered to the Trustee under the provisions 
of this Section 3 of Article Second shall, if uncanceled, thereupon be 
canceled, and shall be stamped by the Trustee with a notation that the 
same have been refunded under this indenture, and returned to the 
‘Telephone Company. No bonds shall be subsequently issued hereunder 
in place of bonds that shall have been so refunded, stamped and re- 
turned. 

Section 4, Additional bonds secured by this indenture may from time 
to time be issued hereunder either (a) to refund, pay, redeem, retire, 
purchase or otherwise acquire, before, at or after maturity, (1) any 
bonds of ‘The Home District Telephone Company referred to in the 
granting clause of this indenture, and (2) any bonds or other obliga- 
tions secured by mortgage or other lien upon any property which may 
hereafter be acquired by the Telephone Company and become subject 
to the lien of this indenture and which mortgage or other lien is prior 
to the lien of the bonds issued hereunder, or (b) to reimburse the 
Telephone Company for money expended for any of said purposes. All 
such bonds or other obligations are hereinafter referred to collectively 
as underlying bonds. 

(1) Whenever, from time to time, the Telephone Company shall 
deposit with the Trustee before, at or after maturity, any of said un- 
derlying bonds, canceled or uncanceled, with all unmatured coupons, if 
any, thereto appertaining, either in bearer form or accompanied by 
proper instruments of assignment and transfer, or shall furnish to the 
‘Trustee evidence satisfactory to the Trustee that any such bonds, in- 
cluding those acquired for sinking fund purposes, have been paid and 
satisfied in full, the Trustee, upon request of the Telephone Company, 
evidenced by a certified copy of a resolution of its Board of Directors, 
shall authenticate and deliver to, or upon the written order of, the 
Telephone Company, bonds secured by this indenture of any series re- 
quested by it, of a principal amount equal to the principal amount of 
such bonds so delivered to the Trustee or/and of such bonds so proved 
to have been paid and satisfied. 

(2) From time to time, before, at or after, the maturity of any of 
said underlying bonds, the Telephone Company may sell or otherwise 
dispose of bonds of any series secured by this indenture, in order to 


FORM OF CORPORATE MORTGAGE 349 


Article Second, Section 4. 
provide, in whole or in part, the means to pay, redeem, purchase or 
otherwise acquire any part of such bonds then outstanding, and the 
Trustee shall thereupon authenticate and deliver to, or upon the writ- 
ten order of, the ‘Telephone Company bonds of any series requested by 
it secured by this indenture of an aggregate principal amount equal to 
the aggregate principal amount of the bonds to be so paid, redeemed, 
purchased or otherwise acquired, provided that, in each case an amount 
of money equal to the aggregate principal amount of the bonds so to be 
paid, redeemed, purchased or otherwise acquired shall simultaneously 
with the delivery of said bonds secured hereby be deposited with the 
Trustee. Out of the money so deposited with the Trustee, it shall, upon 
demand of the Telephone Company, and upon the delivery to the Trus- 
tee, in bearer form, or accompanied by proper instruments of assign- 
ment and transfer, of any one or more of the bonds so paid, redeemed, 
purchased or otherwise acquired by the Telephone Company, pay to it 
or upon its written order, a sum equal to the principal amount of the 
bonds so delivered to the Trustee. 

Whenever the Telephone Company shall request the authentication 
of bonds for any of such purposes, it shall deliver to the Trustee, in 
addition to said bonds or cash, a certified copy of a resolution of its 
Board of Directors, requesting the Trustee to authenticate and deliver 
to, or upen the written order of, the Telephone Company, a stated 
amount of said bonds to be sold or otherwise disposed of, for or in re- 
spect of the payment, purchase, redemption or acquisition of a stated 
number of underlying bonds, specifying such underlying bonds, and 
stating that said amount of bonds to be issued hereunder is required 
for such purpose. 

(3) Every underlying bond which shall be deposited with the Trus- 
tee under the provisions of this Section 4 of Article Second shall be 
stamped by the Trustee substantially as follows: “Not negotiable. Held 
in trust for the purposes declared in the First and Refunding Mort- 
gage of The Telephone Company of America, dated October 1, 1925,” 
and shall be held by the Trustee as purchaser, without merger or ex- 
tinguishment or impairment of lien, and if not previously canceled, 
then in uncanceled form, as part of the security for the bonds issued 
and to be issued under this indenture, unless and until disposed of as 
hereinafter in this paragraph (3) authorized and directed. 

Until default of the character described in Section 2 of Article Ninth 
hereof, and its continuance for the period therein specified, neither the 
principal nor the interest of any underlying bonds at any time held by 
the Trustee shall be collected or shall be required to be paid, and the 
coupons thereto appertaining, as they mature, shall be canceled by the 
Trustee and delivered to the Telephone Company, except that if de- 
fault be made in the payment of the interest and principal of any of the 


350 APPENDIX I 


Article Second, Section 5. 

underlying bonds not held by the Trustee hereunder, the coupons ap- 
pertaining to any such bonds of the same issue, held subject to the lien of 
this indenture, shall not after such default be canceled, and the Trus- 
tee may demand and enforce any sums due, whether for interest or as 
principal, on any such bonds or uncanceled coupons, or may take such 
other action as shall, in its judgment, be desirabla or necessary, and in 
all respects such bond so held by the Trustee shall be enforceable equally 
and ratably with all other like bonds not so held by the Trustee. The 
Trustee shall be reimbursed by the Telephone Company, or from the 
trust estate, for all expenses by it properly incurred by reason of any 
such action taken, with interest, and the amount of such expenses and 
interest shall, until repaid, constitute a lien upon the mortgaged prop- 
erty prior to the lien of this indenture. If at any time all of the under- 
lying bonds of any issue shall be deposited with the Trustee, or shall 
have been proved to the satisfaction of the Trustee to have been paid 
and satisfied in full, and there shall not be outstanding any mortgage 
or other lien, which is junior to the mortgage securing such deposited 
bonds and prior to the lien of this indenture, upon any part of the mort- 
gaged property, then, the bonds of such issue then held by the Trustee 
shall be canceled by the Trustee and surrendered to the Telephone Com- 
pany, and, in such case, the Telephone Company shall procure the 
satisfaction and discharge of the mortgage securing said canceled bonds. 
In case the Telephone Company shall fail or neglect to take such steps 
as may be necessary to procure the satisfaction and discharge of record 
of the mortgage securing said canceled bonds, the ‘Trustee may take 
or cause to be taken, at the expense of the Telephone Company, such 
steps as in its opinion may be necessary to procure the satisfaction and 
discharge of record of the said mortgage. 

Section 5. Additional bonds secured by this indenture may from time 
to time, within the limit prescribed by Section 1 of this Article Second, 
be issued hereunder, subject only to the following conditions: 

(1) The aggregate principal amount of bonds which the Telephone 
Company shall be entitled to have authenticated under the provisions 
of this Section 5 of Article Second may equal, but shall not exceed, 
seventy-five per cent of the actual cash cost to the Telephone Com- 
pany of additions to, or extensions of, or betterments and improvements 
of, the telephone plant and system hereby mortgaged made or acquired 
by the Telephone Company subsequent to the date of this indenture 
and subject to the lien hereof, plus seventy-five per cent of the actual 
cash cost to it of stock, bonds and other securities acquired by the 
Telephone Company subsequent to the date of this indenture, which 
represent interests in telephone properties and which shall be pledged 
with the Trustee subject to the lien of this indenture; provided that 
bonds shall not be authenticated under this Section 5 of Article Second 


FORM OF CORPORATE MORTGAGE 351 


Article Second, Section 5. 
on account of stock, bonds or other securities, if thereupon more than 
10 per cent of the reasonable value of the property subject to the lien 
of this indenture would consist of stock, bonds or other corporate 
obligations. 

Such bonds may also be authenticated and delivered in advance of 
the acquisition of such property or securities, or the doing of such work, 
if, simultaneously with the delivery of such bonds, the Telephone Com- 
pany shall deposit with the Trustee the cash proceeds of the bonds so 
authenticated and delivered. The moneys so deposited with the Trustee 
(hereinafter referred to as “deposited moneys’) shall be held by the 
‘Trustee as a trust fund, subject to the lien of this indenture and as 
part of the trust estate, until they shall have been paid out from time 
to time as hereinafter provided in this Section 5 of Article Second. 

(2) Bonds shall not be authenticated under the provisions of this 
Section 5 of Article Second if the net earnings of the Telephone Com- 
pany, after providing for the payment of taxes, available for interest 
purposes, during the period of twelve consecutive calendar months end- 
ing not more than sixty days prior to such request for authentication, 
shall have been less than one and three-quarters times the interest on 
the bonded indebtedness of the Telephone Company, including the 
interest on the outstanding bonds, if any, of The Home District Tele- 
phone Company and all other underlying bonds, and on the bonds 
proposed to be issued, but not including the interest payable by the 
Telephone Company on any bonds in any sinking fund. 

(3) Whenever requesting the authentication of any bonds under 
the provisions of this Section 5 of Article Second, the Telephone Com- 
pany shall furnish to the Trustee (a) a certified copy of a resolution 
of the Board of Directors of the Telephone Company, setting forth 
(1) the aggregate amount of bonds issued hereunder at the time out- 
standing, (2) the purpose of the issue of the bonds of which authentica- 
tion is requested, and (3) the amount, series and denominations of 
such bonds; and (b) a certificate showing that the net earnings of the 
‘Telephone Company have been sufficient to comply with the terms of 
paragraph 2 of this Section 5 of Article Second. 

(4) Whenever requesting the payment of deposited moneys, or the 
authentication of any bonds under the provisions of this Section 5 of 
Article Second (except in case the cash proceeds thereof are deposited 
with the Trustee as hereinbefore provided), the Telephone Company 
shall furnish to the trustee a certificate or certificates describing in 
reasonable detail the property or securities or work on account of which 
the authentication of bonds, or the payment of cash is requested, and 
stating (a) the actual cash cost thereof to the Telephone Company 
and that such property or securities were acquired or the work done 
subsequent to the date of this indenture; (b) that no part of the ex- 


352 APPENDIX I 


Article Second, Section 5. 

penditures has been included in any certificate previously furnished 
to the Trustee under any of the provisions of this Article Second or 
has been made the basis of the withdrawal of any moneys or the release 
of property or securities under any other provision of this indenture, 
or has been made or incurred for repairs, maintenance or renewals; 
(c) that the Telephone Company, to the knowledge of the officers 
making such certificates, is not in default in the performance of the 
provisions of this indenture; (d) whether any property so acquired is 
subject to any lien or charge, which shall be particularly described, 
excepting undetermined liens and charges incident to construction and 
taxes for the current year, and setting forth the amount of every such 
lien or charge; and (e) such certificate may also state any other fact 
pertaining to the issue and authentication of bonds or the payment of 
deposited moneys under this Article Second. In case such certificate or 
certificates shall apply to any shares of stock, bonds or other obliga- 
tions of other corporations, of the nature and character in this Section 5 
of Article Second specified, such certificate or certificates shall also 
state the amount of the capital stock of each such corporation outstand- 
ing, the amount thereof then owned or to be acquired by the Telephone 
Company, the reasonable value of the property then subject to the lien 
of this indenture, and the proportion of such reasonable value repre- 
sented by stock, bonds or other corporate obligations, and such certifi- 
cate or certificates shall be accompanied by an opinion of counsel satis- 
factory to the Trustee (who may be counsel for the Telephone Com- 
pany), that such shares of stock, bonds or other obligations have been 
legally issued, that the acquisition thereof by the Telephone Company 
is authorized by law, and that any shares of stock so acquired are fully 
paid and non-assessable. 

In every case, where additional real estate is acquired, there shall 
be furnished to the Trustee an opinion of counsel satisfactory to it 
(who may be counsel for the Telephone Company) to the effect that 
the Telephone Company has good title thereto, together with all such 
deeds, conveyances or instruments of further assurance which may be 
necessary for the purpose of subjecting the same to the lien and opera- 
tion of this indenture as a first lien thereon (except the liens, if any, 
specified in paragraph (d) of the certificate hereinbefore referred to), 
unless, in the opinion of such counsel, no such deeds, conveyances or 
instruments of further assurance are necessary for such purpose; and 
all such additional real estate shall forthwith and ipso facto become 
subject to the lien of this indenture. 

Every certificate furnished under this Section 5 of Article Second 
shall be signed by the President or a Vice-President, and also by the 
Treasurer or chief accounting officer, or an Engineer of the Telephone 
Company. ‘The same person need not certify to all the facts required 


FORM OF CORPORATE MORTGAGE 353 


Article Second, Sections 6 and 7. 
to be certified, but different persons may certify to different facts 
respectively. 

Upon receipt of such certificate or certificates, and a certified copy 
of such resolution or resolutions and other writings, the [rustee shall 
authenticate and deliver to, or upon the written order of, the Telephone 
Company, an amount of bonds secured hereby of the description called 
for in such resolution, of the aggregate principal amount requested by 
the Telephone Company but not exceeding seventy-five per cent of the 
expenditures, as set forth in such certificate or certificates, or pay to 
the Telephone Company from the deposited moneys the cash proceeds 
of the sale of a face amount of bonds equal to seventy-five per cent of 
such expenditures. Provided, however, that if it shall appear in the 
certificate to be furnished hereunder that any property, on account 
whereof request is made for the payment of deposited moneys or the 
authentication of any bonds, is subject to any lien or charge required 
to be stated in such certificate, the face amount of such lien or charge 
as so certified shall be added to the cost stated in said certificate, for 
the purpose of ascertaining the total cost of such property, and there- 
upon the Trustee shall reserve from the aggregate face amount of bonds 
which the Telephone Company would otherwise be entitled to have 
certified and delivered a face amount equal to the amount of such lien 
and incumbrance and the balance remaining shall be the face amount 
of bonds which the Trustee shall certify and deliver or the proceeds of 
the sale of which the Trustee shall pay, in the first instance. 

Section 6. No bond shall be authenticated or delivered by the Trus- 
tee in case the Telephone Company shall at the time be in default in 
the payment of interest or principal of any of the bonds secured hereby, 
or in default in the observance of any of the covenants on its part to 
be performed under the provisions of this indenture and such default 
shall be known to the Trustee. 

Section 7. ‘The resolutions, certificates and other instruments pro- 
vided for in this Article Second may be accepted by the Trustee as 
satisfactory and conclusive evidence as to the statements therein con- 
tained and shall be full authority to the Trustee for the authentication 
and delivery of bonds or for the payment of the proceeds thereof, but 
before authenticating and delivering any bonds under this Article Second 
or before making any payment of the proceeds thereof, the Trustee 
may, in its discretion, and shall, if requested in writing so to do by 
the holders of not less than 25% in amount of bonds then outstand- 
ing hereunder and furnished with indemnity satisfactory to it, cause 
to be made such independent investigation as it may see fit, and in 
that event, may decline to authenticate and deliver such bonds or to 
make any payment of the proceeds thereof, unless and until satisfied by 
such investigation of the substantial accuracy of such resolutions, cer- 


354 APPENDIX I 


Article Third, Sections 1 and 2. 

tificates and other instruments. ‘The reasonable expense of any such 
investigation shall be paid by the Telephone Company, or, if paid by 
the Trustee, shall be repaid by the Telephone Company upon demand, 
and until repaid, shall be a first charge upon the trust estate. 


ARTICLE THIRD 


Concerning Securities of other Corporations. 


Section 1. If the Telephone Company shall request the Trustee to 
certify any bonds under the provisions of Section 5 of Article Second 
hereof, on account of the acquisition by the Telephone Company of 
stock, bonds or other obligations of other corporations, the Telephone 
Company shall, simultaneously with the delivery to it of such bonds 
by the Trustee, deposit with the Trustee certificates for all such shares 
of stock and such bonds or other corporate obligations, which stock, 
bonds and other obligations shall thereupon become subject to the lien 
of this indenture. Such certificates of stock, and such bonds, if regis- 
tered, shall be accompanied by irrevocable powers of attorney sufficient 
to enable the Trustee to make such transfers thereof as it may be author- 
ized by this indenture to make. Until default, such shares of stock 
and registered bonds shall not be transferred into the name of the 
‘Trustee or any other person. 

The Trustee, at the request of the Telephone Company, may do 
whatever may be necessary for the purpose of maintaining, preserving, 
renewing or extending the corporate existence of any company, all or a 
part of whose capital stock shall be held by the Trustee hereunder, 
and for such purpose, from time to time and whenever requested in 
writing by the Telephone Company, the Trustee shall sell, assign, 
transfer and deliver (for a nominal consideration if the ‘Telephone 
Company shall so desire) a sufficient number of any shares of stock 
that then shall be held by the Trustee hereunder, to qualify persons 
to act as directors of, or in any official relation to the several com- 
panies which shall have issued such shares; and in every such case the 
‘Trustee may make such arrangements as it shall deem necessary for the 
protection of the trusts hereunder. 

Section 2. So long as there shall be no continuing default of the 
character hereinafter in Section 2 of Article Ninth specified, the Tele- 
phone Company shall have the right to receive, hold and dispose of, 
free from all the trusts hereof, the dividends or other income which 
may be paid upon any stocks, bonds or other corporate obligations which 
may, at any time be owned by it and pledged with the Trustee, and 
the Trustee shall from time to time deliver to the ‘Telephone Company 
all such suitable orders in the premises as are necessary and proper to 
enable the Telephone Company to collect and receive the same, and 


FORM OF CORPORATE MORTGAGE 355 


Article Third, Section 2. 


the Trustee at once shall pay over to the Telephone Company any such 
dividend or income which may be collected or received by it. 

Provided, however, and hereby it is declared and agreed, except as 
in this indenture otherwise expressly provided, that (1) the Telephone 
Company shall not be entitled to receive and the Trustee shall not pay 
over to the Telephone Company the principal of any bond or other 
corporate obligation subject to the lien of this indenture; (2) the 
Telephone Company shall not be entitled to receive and the Trustee 
shall not pay over to the Telephone Company any interest on any such 
bond or corporate obligation which shall have been collected or paid 
out of the proceeds of any sale or condemnation of the property covered 
by a mortgage securing such bonds or corporate obligations, or out of 
the proceeds of sale of any other property of the company liable upon 
such bonds or obligations in case of the dissolution or liquidation of 
such company, it being the intention that the Telephone Company 
shall be entitled to receive only payment made out of the rents, revenues, 
income or proceeds of operation of such properties; (3) the Telephone 
Company shall not collect any such coupons or interest by legal pro- 
ceedings or by enforcement of any security therefor. except with the 
assent of the Trustee nor in any manner which the Trustee shall deem 
prejudicial to the trusts hereunder; (4) the Telephone Company shall 
not be entitled to collect any stock dividends that may be declared on 
any shares of the capital stock of other corporations that. shall be subject 
to the lien of this indenture, and in case any stock dividends are so 
declared the certificates therefor shall by the Telephone Company be 
endorsed and delivered to the Trustee; (5) the Telephone Company 
shall not be entitled to collect any cash dividends on any such shares 
that may become payable upon or in the course of the dissolution, 
liquidation or winding up of any such company or in any way shall 
be chargeable to or payable out of capital; and that (6) until actually 
paid, released or discharged, every coupon or right to interest or divi- 
dends and all such other claims and indebtedness shall remain subject 
to this indenture. The Trustee shall be entitled to assume that any 
interest received by the Trustee on any bond or other obligation or any 
dividend received in money on any shares of stock is paid out of rents, 
revenues, income or proceeds of operation, until the Trustee shall be 
notified in writing to the contrary; and, in the absence of such written 
notification, it shall be presumed, as between the Trustee and the 
bondholders, that the Trustee in making any payment thereof to the 
Telephone Company acted in good faith. If any such coupons or 
interest obligations delivered to the Telephone Company shall not forth- 
with be paid or canceled, the Telephone Company shall return the 
same to the Trustee. 

In case (1) any sum shall be paid on account of the principal of any 


356 APPENDIX I 


Article Third, Section 3. 


bonds or (except as herein otherwise expressly provided) of any obli- 
gation or indebtedness subject to the lien of this indenture, or in case 
(2) any sum on account of the interest on any such bonds or obliga- 
tions shall be paid out of the proceeds of any sale or condemnation of 
property covered by mortgage or trust deed securing such bonds, obli- 
gations, or indebtedness, or in case (3) upon the dissolution or liquida- 
tion of any company any sum shall be paid upon any bonds or any 
shares of stock or any claims against or indebtedness’ of such company, 
subject to the lien of this indenture, then, in any such case, any such 
sum, unless received by a trustee under some indenture which is a 
prior lien thereon upon the trusts of such indenture, or unless applied 
on account of the purchase price of property purchased pursuant to 
Section 4 of this Article Third, shall be paid over to the Trustee and 
by it shall be held to be disposed of as provided in Section 3 of Article 
Eighth hereof. 

Section 3. While the Telephone Company shall not be in default 
as aforesaid it shall have the right to vote upon all shares of stock sub- 
ject to the lien of this indenture, for all purposes not inconsistent with 
the provisions or purposes of this indenture, and from time to time 
upon demand of the Telephone Company the Trustee forthwith will 
cause to be executed and delivered to the Telephone Company, or 
its nominee or nominees, suitable powers of attorney or proxies for 
such purpose; provided, however, that such voting power shall not at 
any time be exercised for the purpose of authorizing any increase in 
the stock, or, except as hereinafter expressly authorized, any lien, secu- 
rity or charge to be created or imposed upon the property or franchises 
of any corporation two-thirds or more of whose outstanding capital 
stock is pledged hereunder, unless effective provision be made by the 
pledge of additional stock so that the ratio of the stock of such corpora- 
tion pledged hereunder to its entire outstanding stock shall not be de- 
creased, or unless the bonds or other obligations evidencing any such 
lien, security or charge, immediately upon their creation and issue shall 
be acquired by the Telephone Company and pledged subject to all the 
terms and conditions of this indenture, and for the purpose of such 
acquisition bonds secured hereby may be issued in accordance with the 
terms of Article Second hereof. 

Nothing in this Article Third contained shall require the assignment 
or pledge under this indenture, or prevent the creation, issue or disposi- 
tion by any company, all or part of whose outstanding capital stock may 
at the time be pledged hereunder, free from the lien thereon of this 
indenture, of any of the following: 

(a) any promissory obligations or other evidences of indebtedness 
which may be issued in the current operation of its property by such 
company; or 


FORM OF CORPORATE MORTGAGE 357 


Article Third, Section 4. 

(b) a purchase money mortgage or purchase money lien upon any 
property which may hereafter be acquired by such company and which 
purchase money mortgage or lien shall apply to and be a charge upon 
only such property so acquired ; or 

(c) the refunding, renewal or extension of bonds or other obliga- 
tions (other than underlying bonds) of such a company at any time 
validly outstanding. 

So long as there shall be no continuing default of the character here- 
inafter in Section 2 of Article Ninth specified, the Telephone Company 
at any time and from time to time may consent to the refunding, re- 
newal or extension by any other company of any issue of its bonds or 
obligations (other than underlying bonds) the whole or part of which 
shall be subject to the lien of this indenture. Unless there shall be 
such continuing default and the Trustee shall have been notified thereof, 
the Trustee, if requested in writing by the Telephone Company, shall 
consent to any such refunding, renewal or extension. In case such a 
default shall have occurred and shall be continuing, the Trustee may, 
in its discretion, consent to such refunding, renewal or extension by 
any company of any issue of its bonds as above provided, without the 
consent or request of the Telephone Company. 

In case any bonds or obligations subject to the lien of this indenture 
shall be refunded, the refunding bonds or obligations acquired by the 
Telephone Company in lieu thereof shall forthwith be pledged subject 
to the lien of this indenture and shall be held in the same manner as 
those for which they are substituted. In case any bonds or obligations 
subject to the lien of this indenture shall be so renewed or extended 
such bonds or obligations as so renewed or extended shall continue to 
be secured as before, and shall remain subject to the lien of this inden- 
ture in the same manner as theretofore. 

Section 4. In case at any time all or any of the property of any 
corporation all or part of whose outstanding capital stock and/or bonds 
and/or other obligations are pledged hereunder shall be sold at any judi- 
cial or other involuntary sale, the Trustee in its discretion may, and if re- 
quested in writing by the Telephone Company or by the holders of a ma- 
jority in amount of the bonds hereby secured and then outstanding, and if 
supplied with the amount of money necessary therefor, shall purchase 
or cause to be purchased such property and shall use such stocks, bonds 
and other obligations so far as may be to make payment for such 
property; and in case of such purchase the Trustee shall take such 
steps as it may deem proper to cause such property to be vested in the 
Telephone Company and become subject to the lien hereof or to be 
vested in some other corporation organized or to be organized, with 
power to acquire and manage such property, provided that all the bonds 
and other indebtedness (except such, if any, as the property was ac- 


358 APPENDIX I 


Article Third, Sections 5 and 6; Article Fourth, Section 1. 


quired subject to) and all the outstanding capital stock thereof (except- 
ing the number of shares required to qualify directors), shall be de- 
posited with the Trustee, and shall be held for the benefit of the 
Telephone Company or its assigns, subject to this indenture. 


Section 5. The Trustee at any time may and, if requested by the 
Telephone Company, shall take such steps as in its discretion it may 
deem advisable to protect its interests and the interests of the bond- 
holders in respect of any stock, bonds, or other corporate obligations 
subject to the lien hereof, and for that purpose it may join in any plan 
of reorganization in respect of any such stock, bonds or other corporate 
obligations, subject to the lien hereof and may accept in leu of any 
securities subject to the lien hereof, new securities issued in exchange 
therefor under such plan. 


Section 6. ‘The Telephone Company covenants that on demand of 
the Trustee it forthwith will pay or will satisfactorilz-provide for all 
expenditures incurred by the Trustee under any of the provisions of 
Sections 4 and 5 of this Article, including all sums required to obtain 
and perfect the ownership and title to any property which the Trustee 
shall purchase or cause to be purchased pursuant to the provisions 
thereof, and in case the “Telephone Company shall fail so to do, then 
without impairment of, or prejudice to, any of its rights hereunder by 
reason of the default of the Telephone Company, the Trustee in its 
discretion may advance all such expenses and other moneys required, 
or may procure such advances to be made by others, and for such 
advances made by the Trustee or by others, at its request, with interest 
thereon, the Trustee shall have a lien prior to the lien hereof upon all 
the bonds or stock in respect of which such advances have been made 


and the proceeds thereof and upon any property acquired by means 
thereof. 


ARTICLE FOURTH 
Sinking Fund. 


Section 1. The Telephone Company covenants that, as and for a sink- 
ing fund for the benefit and security of the bonds of Series A issued 
hereunder, it will pay to the Trustee, on the first day of April, and 
on the first day of October in each year beginning with the year 1926, 
the sum of two hundred and five thousand dollars ($205,000). The 
moneys so paid to the Trustee shall be applied by it to the purchase 
of bonds of said Series A at the lowest price at which they can be 
obtained readily, but not exceeding 105 per cent of the principal amount 
thereof and accrued interest. The Trustee may advertise publicly for 
proposals to sell such bonds to the sinking fund or may purchase the 
same either at public or private sale, as to it may seem most advisable. 


FORM OF CORPORATE MORTGAGE 359 


Article Fourth, Section 2; Article Fifth, Section 1. 
If and whenever bonds are not offered to the sinking fund at a price 
not exceeding 105 per cent. of the principal amount thereof and ac- 
crued interest in amounts sufficient to exhaust such fund, the Trustee 
shall forthwith, and in any case on or before the interest payment date 
next succeeding the sinking fund payment, call such additional bonds 
as may be necessary to exhaust such fund. Such additional bonds shall 
be so called by lot by the Trustee on any date at 105 per cent of the 
principal amount thereof with accrued interest thereon, upon the notice 
and in the manner provided in Article Fifth hereof in respect of the 
redemption of bonds by the Telephone Company. Each and every 
holder of the bonds hereby agrees, upon any such call for acquisition 
of such bonds for the sinking fund, to accept payment thereof when 
called in accordance with the terms of this indenture, and interest on 
such bonds shall cease after the date of call except as hereinafter pro- 
vided. Bonds acquired for the sinking fund as provided in this Article 
Fourth shall not be canceled but shall be stamped by the Trustee ‘Held 
for sinking fund for Series A bonds under First and Refunding Mort- 
gage of the Telephone Company of America, dated October 1, 1925;” 
and the Trustee shall collect, and the Telephone Company covenants 
to pay to the Trustee, the interest from time to time maturing on the 
bonds held in the sinking fund. All such interest moneys shall be in- 
cluded in the sinking fund as additional payments thereto by the Tele- 
phone Company, to be applied as in this Article Fourth provided in 
respect of other sinking fund moneys for the acquisition of Series A 
bonds. Except for the purpose of such collection of interest by the 
Trustee, bonds held in the sinking fund shall not be deemed outstanding 
for any purpose of this indenture. 

Section 2. In the creation of any other series of bonds hereunder 
the Telephone Company may by vote of its Board of Directors estab- 
lish a sinking fund and fix the amount and other terms thereof. Such 
terms shall be appropriately expressed in each of the bonds of such series, 


| ARTICLE FIFTH 
Redemption of Bonds 


Section 1. The Telephone Company may, at its option, on any 
interest-payment date, redeem all or any of the bonds of Series A then 
outstanding hereunder, at 105 per cent of the face value thereof, with 
accrued interest thereon, upon sixty days’ notice as hereinafter pro- 
vided, and each of the bonds of said Series shall contain a provision to 
that effect. 

In the creation of any other series of bonds hereunder the Telephone 
Company may reserve the right to redeem, before maturity, all or any 


360 APPENDIX I 


Article Fifth, Section 1. 

part of the bonds of such series at such time or times and on such terms 
as the Board of Directors of the Telephone Company may determine 
and as shall be appropriately expressed in each of the bonds of such 
series, the day of redemption being in every case an interest payment 
date. 

In case the Telephone Company shall desire to exercise such right to 
redeem and to pay off all, or, as the case may be, any part of the bonds 
of a particular series in accordance with the right reserved so to do, 
it will publish in two daily newspapers of general circulation published 
in the Borough of Manhattan, in the City of New York, the first such 
publication to be at least sixty and not more than eighty days prior to 
the date fixed for payment, and thereafter publication to be made at 
least once during each week until said redemption date, a notice to the 
effect that the Telephone Company has elected to redeem and pay off 
all the bonds of such series or a part thereof, as the case may be, on such 
date, specifying in case of partial redemption the serial numbers of the 
coupon bonds to be redeemed and the serial numbers of the coupon 
bonds endorsed on the registered bonds without coupons to be redeemed, 
and in every case stating that on said date there will become due and 
payable upon each of the bonds or, in case of partial redemption, upon 
each coupon bond and upon each registered bond without coupons or 
portion thereof, so to be redeemed, at the office or agency of the Tele- 
phone Company at which the principal of the bonds is payable, the 
principal thereof with such premium, if any, as is specified in such bonds, 
together with the accrued interest to such date, and that from and after 
said date interest thereon will cease to accrue. Similar notice shall be 
sent by the Telephone Company through the mails, postage prepaid, 
at least sixty and not more than eighty days prior to such redemption 
date, to the holders of registered bonds without coupons and to the 
registered holders of coupon bonds so to be redeemed to the addresses 
that shall appear upon the transfer register, but failure so to mail any 
such notice shall not affect the validity of the redemption proceedings. In 
case the Telephone Company shall have elected to redeem and pay off less 
than all the outstanding bonds of any series it shall, in each such instance, 
at least ten days before the date upon which the first publication of the 
notice of redemption hereinbefore mentioned is required to be made, no- 
tify in writing the Trustee of its said election and of the aggregate prin- 
cipal amount of bonds of such series to be redeemed, and thereupon the 
Trustee shall draw by lot, in any manner by it deemed proper, from’ the 
serial numbers of coupon bonds of said series outstanding and the serial 
numbers of coupon bonds endorsed upon registered bonds without 
coupons of said series outstanding, the distinguishing numbers of an 
amount of bonds of such series equal to such aggregate principal amount, 
and shall within five days after receiving the notice aforesaid notify 


FORM OF CORPORATE MORTGAGE 361 


Article Fifth, Section 2. 


the Telephone Company in writing what bonds shall have been so 
drawn. If any numbers so drawn shall be the numbers of coupon bonds 
endorsed on outstanding registered bonds without coupons, the notice 
of redemption hereinbefore mentioned shall specify the respective num- 
bers of such registered bonds as well as the serial numbers of the coupon 
bonds so drawn, and in the case of any registered bonds without coupons 
which are to be redeemed in part only (by reason of the fact that the 
serial numbers of all of the coupon bonds endorsed on such registered 
bonds shall not have been drawn), said notice shall specify the respec- 
tive portions of the principal amount thereof to be redeemed, and state 
that upon presentation of such registered bonds for redemption new 
bonds of the same series of an aggregate principal amount equal to the 
unredeemed portions of such registered bonds will be issued in lieu 
thereof. In case there shall have been drawn for redemption as afore- 
said one or more but less than all of the coupon bonds with serial 
numbers endorsed upon a registered bond without coupons, the Tele- 
phone Company shall execute and the Trustee shall authenticate and 
deliver to the registered holder thereof or on his order and at the ex- 
pense of the Telephone Company, a new bond or new bonds for the 
amount of the surrendered registered bond less the principal amount 
paid on surrender and partial payment of the bond so partially re- 
deemed. 

From and after the redemption date specified in the notice above 
provided for (unless the ‘Telephone Company shall fail to pay upon 
demand the bonds to be redeemed as herein provided) no further inter- 
est shall accrue upon any of the bonds so to be redeemed (or, in the case 
of registered bonds, only a portion of the face amount of which is to 
be redeemed, on such portion thereof), and anything in said bonds or 
in such coupons or in this indenture to the contrary notwithstanding, 
any coupons for interest pertaining to any such bonds and maturing 
after said date shall become and be null and void. 

Section 2. On the deposit with the Trustee of the amount necessary 
so to redeem all the outstanding bonds secured by this indenture (if 
they shall be redeemable and shall all have been duly called for redemp- 
tion) together with proof by affidavit that said notice or notices of re- 
demption have been given as hereinbefore provided for, and on pay- 
ment to the Trustee of all its costs, charges and expenses in relation 
thereto or otherwise under this indenture, the Trustee shall cancel and 
satisfy this indenture and cause the same, at the expense of the Tele- 
phone Company, to be discharged of record, and shall assign or cause 
to be assigned and shall deliver to the Telephone Company or upon its 
order all securities and moneys then held by the Trustee under the pro- 
visions hereof other than the moneys deposited under this Section 2 of 
Article Fifth. The moneys so deposited with the Trustee shall be ap- 


362 APPENDIX I 


Article Fifth, Section 3; Article Sixth, Sections 1, 2, 3. 
plied by it to the payment of the bonds issued under this indenture at 
the redemption rate or rates with accrued interest to the interest day 
or days designated for redemption. 

Section 3. All bonds redeemed and paid under this Article Fifth 
shall be canceled and, on demand, surrendered to the Telephone Com- 


pany. 
ARTICLE SIXTH 


Particular Covenants of the Telephone Company 


The Telephone Company hereby covenants and agrees as hereinafter 
in this Article set forth: 

Section 1. That it will duly and punctually pay the principal and 
interest of every bond authenticated and delivered by the Trustee under 
this indenture, at the dates, place and in the manner mentioned in such 
bonds or any coupons thereto belonging, according to the true intent 
and meaning thereof. ‘The interest on the coupon bonds until maturity 
shall be payable only upon the presentation and surrender of the several 
coupons for such interest as they respectively mature, and when paid, 
such coupons shall forthwith be canceled. ‘The interest on the regis- 
tered bonds without coupons shall be payable only to the registered 
holders thereof. 

That it will not directly or indirectly, extend, or assent to the ex- 
tension of, the time for payment of any coupon or claim for interest on 
any bond secured hereby, and that it will not, directly or indirectly, be 
a party to any arrangement therefor by purchasing or funding said 
coupons or claims for interest or in any other manner. 

Section 2. That at all times, until the payment of the bonds issued 
hereunder, it will cause an office or agency to be maintained by it in the 
Borough of Manhattan, City of New York, where the bonds and 
coupons may be presented for payment, and notices and demands in 
respect of the bonds and coupons under this indenture may be served, 
and will, by written notice, designate such office or agency to the Trus- 
tee. In default of any such office or agency, presentation for payment 
may be made and notice and demand served at the principal office in 
said Borough of Manhattan of the Trustee or any successor to it in 
the trust. 

Section 3. The Telephone Company will, within thirty days after 
the execution of this indenture, execute and deliver to the Trustee an 
instrument or instruments supplemental hereto conveying to the Trus- 
tee upon the trusts and conditions hereby created all the real estate 
hereby mortgaged, or intended to be, by appropriate and detailed de- 
scription. At any and all times it will do, execute, acknowledge and 
deliver, or will cause to be done, executed, acknowledged and deliv- 


FORM OF CORPORATE MORTGAGE 363 


Article Sixth, Sections 4 to 6. 
ered by any other corporation or person obligated to the Telephone 
Company so to do, all and every such further acts, deeds, conveyances, 
mortgages and transfers and assurances as the Trustee shall reasonably 
require for the better assuring, conveying, mortgaging, assigning and 
confirming unto the Trustee all and singular the hereditaments, the 
premises, estates and property hereby conveyed or assigned, or intended 
so to be, or which the Telephone Company may hereafter become bound 
to convey, or assign to the Trustee. 

Section 4. That it has good title to and is possessed of the lands and 
other property described in the granting clauses hereof and thereby 
granted, and the Telephone Company will warrant and defend the 
title to said lands and other property as well as to any lands and other 
property hereafter made subject to the lien of this indenture, to the 
Trustee, its successors in the trust and its and their assigns for the 
benefit of the holders of bonds issued hereunder against claims and de- 
mands of all persons whomsoever; subject, however, in so far as affected 
thereby, to the lien described or referred to in the granting clauses 
hereof and in the case of any such lands and other property hereafter 
subjected to the lien of this indenture to the liens and incumbrances 
thereon, if any, at the time they shall become subject to the lien of 
this indenture. 

Section 5. That it will not voluntarily create, or suffer to be created, 
any debt, lien or charge having priority to the lien of this indenture, 
upon the trust estate, but it shall not be required to pay any such debt, 
lien or charge so long as it shall, in good faith and by appropriate pro- 
ceedings, contest the validity thereof, unless thereby, in the judgment of 
the Trustee, the security afforded by this indenture will be materially 
endangered. ‘That it will not increase the outstanding issue of bonds 
under any underlying mortgage, now or hereafter a lien upon the mort- 
gaged premises or any part thereof. That it will not extend or consent 
to the extension of the time of payment of the principal of any bonds 
secured by any such underlying mortgage, and before or at the maturity 
thereof will pay or cause to be paid the principal of, or will acquire 
and pledge hereunder, all such bonds and, until paid or discharged at 
maturity, or otherwise, will, except as provided in paragraph (3) of 
Section 4 of Article Second hereof, pay the interest thereon or cause 
it to be paid at the times and at the place or places therein, or in the 
coupons attached thereto set forth. 

Section 6. That it will from time to time pay or cause to be paid, 
in respect of the bonds of Series “A,” any and all taxes imposed by the 
Commonwealth of Pennsylvania upon any such bond or upon the holder 
as a resident thereof, not in excess of four mills per annum on each 
dollar of the principal amount of such bonds, and also all taxes and 
assessments lawfully levied or assessed upon the property and fran- 


364 APPENDIX I 


Article Sixth, Sections 7 and 8. 


chises hereby mortgaged or pledged or intended so to be or upon any 
part thereof, and upon all other property, income and profits of the 
Telephone Company, when the same shall become lawfully due and 
payable, and will not suffer any mechanics’, laborers’, statutory or other 
similar liens to remain outstanding upon the mortgaged premises and 
pledged property, or any part thereof, the lien whereof might or could 
be held to be prior to the lien of this indenture; and if any corporation 
at any time while two-thirds or more of its capital stock shall be sub- 
ject to this indenture shall fail to pay all such taxes and assessments 
lawfully imposed upon the property of such corporation or upon the 
income and profits thereof, then the Telephone Company itself will 
pay the same or make adequate provision for the satisfaction and dis- 
charge thereof; provided however, that the Telephone Company or any 
such corporation shall have the right to contest by legal proceedings any 
taxes, assessments or liens not hereby created and pending such con- 
test may delay or defer the payment thereof. 

Section 7. That it will not, except as herein allowed, do or suffer to 
be done any act or thing whereby the lien hereof might or could be 
impaired and that it will at all times maintain, preserve and keep the 
mortgaged premises and every part thereof, with the fixtures and ap- 
purtenances thereof, in thorough repair, working order and condition; 
and that it will from time to time make all needful and proper repairs, 
renewals, replacements, additions, betterments and improvements, so 
that the operations and business thereof and every part thereof shall at 
all times be conducted with safety and expedition; and whenever any 
portion of the mortgaged premises or said fixtures or appurtenances 
shall be worn out or destroyed or shall have become obsolete, inefficient 
or otherwise unfit for use it will procure substitutes of at least equal 
value and capacity so that at all times the value and capacity of said 
mortgaged premises and the fixtures and appurtenances thereof shall 
be fully kept up; and at all times it will set apart, use and apply for 
that purpose so much of the revenue of the property mortgaged as 
may be required for such maintenance. 

Section 8. That it will at all times keep such parts of the said 
mortgaged premises or property as are liable to be destroyed or injured 
by fire insured against loss or damage to the extent that. such property 
is usually insured, or in lieu of or supplementing such insurance, it will 
adopt such other plan or method of protection against loss or damage 
by fire, whether by the establishment of an insurance fund or other- 
wise, as may be determined by the Board of Directors of the Telephone 
Company, and that annually, or at such other times as the trustee shall 
request, it will file with the trustee a statement, in reasonable detail, 
showing the insurance then in force. The proceeds of any such in- 
surance, if exceeding in any case of loss the amount of $25,000, shall, 


FORM OF CORPORATE MORTGAGE 365 


Article Sixth, Sections 9 to 11; Article Seventh, Section 1. 


if not required to be deposited with the Trustee under any mortgage to 
which said property may be subject prior to the lien of this indenture, 
be paid to the Trustee which shall, at the request of the Telephone 
Company and under its direction, pay over the same to the Telephone 
Company from time to time for any of the purposes and in the man- 
ner in Section 3 of Article Eighth hereof set forth. 

Section 9. That it will keep full and complete records and accounts 
showing the sale of each series of bonds issued hereunder, and the price 
or prices received therefor, and the several purposes for which the pro- 
ceeds thereof were expended, and the amounts of such several expendi- 
tures. Such records and accounts shall be open at all times to the in- 
spection of the Trustee. 

Section 10. That it will not issue, negotiate, sell or dispose of any 
bonds hereby secured in any manner other than in accordance with the 
provisions of this indenture and the agreements in that behalf herein 
contained, and in issuing, selling, negotiating or otherwise disposing of 
such bonds, from time to time, it will well and truly apply the same 
or the proceeds thereof, or will cause the same to be applied, to and 
for the purposes herein prescribed and to and for no other or different 
purposes. 

Section 11. That it will pay any mortgage recording tax legally due 
upon the recording hereof and will further record every indenture sup- 
plemental hereto, which may be recorded as a mortgage of real or per- 
sonal property, and will comply with the requirements of any and 
every mortgage recording tax law or similar law affecting the due 
recording of this indenture or any indenture supplemental hereto, and 
will do whatever else may be necessary in order to perfect and con- 
tinue the lien of this indenture upon the mortgaged premises. 


ARTICLE SEVENTH 
Consolidation, Merger and Purchase 


Section 1. Nothing contained in this indenture shall prevent any 
consolidation or merger of the Telephone Company with or into any 
other corporation or corporations, or any conveyance, or transfer, or 
lease, subject to the continuing lien of this indenture of all or any part, 
of the mortgaged property to any corporation lawfully entitled to ac- 
quire or lease and operate the same; provided, however, that such con- 
solidation, merger, conveyance, transfer or lease shall be upon such 
terms as fully to preserve and in no respect to impair the lien and 
security of this indenture, or any of the rights or powers of the Trustee 
or of the bondholders hereunder; and provided, further, that any such 
lease shall be made expressly subject to immediate termination by the 
Telephone Company or by the Trustee at any time during the continu- 


366 APPENDIX I 


Article Seventh, Section 2. 


ation of a default hereunder, and also by the purchaser of the property 
so leased at any sale thereof, whether such sale be made under the power 
of sale hereby conferred or under judicial proceedings; and provided, 
further, that upon any such consolidation, merger, conveyance or trans- 
fer the due and punctual payment of the principal and interest of all of 
said bonds according to their tenor, and the due and punctual perform- 
ance and observance of all of the covenants and conditions of this in- 
denture to be kept or performed by the Telephone Company, shall be 
expressly assumed by the corporation formed by any such consolidation 
or into which such merger shall have been made, or acquiring by con- 
veyance or transfer all the property subject to this indenture. 

Section 2. In case the Telephone Company, pursuant to Section 1 
of this Article, shall be consolidated with or merged into any other cor- 
poration, or shall convey or transfer, subject to the lien of this indenture, 
all the mortgaged property as an entirety, the successor corporation 
formed by such consolidation or into which the Telephone Company 
shall have been merged, or which shall have received a conveyance or 
transfer as aforesaid, and any successor to such consolidated or merg- 
ing corporation whether by successive consolidations, mergers or other- 
wise, upon executing and causing to be recorded an indenture with the 
Trustee satisfactory to the Trustee, whereby said successor corporation 
shall assume and agree to pay, duly and punctually, the principal and 
interest of the bonds hereby secured in accordance with the provisions 
of said bonds and coupons and this indenture, and shall agree to per- 
form and fulfill all the covenants and conditions of this indenture bind- 
ing upon the Telephone Company, shall succeed to and be substituted 
for the Telephone Company, with the same effect as if it had been 
named herein as the mortgagor company; and such successor corporation 
thereupon may cause to be signed, issued and delivered in its own name 
any or all of such bonds which shall not theretofore have been signed 
by the Telephone Company and authenticated by the Trustee, and upon 
the order of such successor corporation in lieu of the Telephone Com- 
pany, and subject to all the terms, conditions and limitations in this 
indenture prescribed, the Trustee shall authenticate and deliver any of 
such bonds which shall have been previously signed and delivered by 
the Telephone Company to the Trustee for authentication, and any of 
such bonds which such successor corporation shall thereafter, in ac- 
cordance with the provisions of this indenture, cause to be signed and 
delivered to the Trustee for such purpose. All the bonds so issued 
shall in all respects have the same legal right and security as the bonds 
theretofore or thereafter issued in accordance with the terms of this in- 
denture as though all of said bonds had been issued at the date of the 
execution hereof. In case of such consolidation or merger or convey- 
ance and transfer such changes in phraseology and form (but not in 


FORM OF CORPORATE MORTGAGE 367 


Article Seventh, Section 3. 
substance) may be made in the bonds hereby secured, thereafter to be 
issued, as consequent upon such consolidation or merger, or conveyance 
and transfer, may be appropriate. 

The Trustee may receive the opinion of any counsel selected by it 
(who may be the counsel of the Telephone Company) as conclusive 
evidence that any such indenture complies with the foregoing conditions 
and provisions of this Section. 

Section 3. Any corporation, all or any part of whose outstanding 
capital stock is pledged hereunder, may be consolidated or merged with, 
or all or any part of the property of any such corporation may be sold 
or conveyed to, the Telephone Company or any other corporation, pro- 
vided, however, that in case of the consolidation or merger with or sale 
and conveyance to any other corporation than the Telephone Company, 
there shall continue to be or shall be made subject to the lien of this 
indenture, all stock issued in respect of the previously pledged stock; 
and provided further that, in case more than a majority of the out- 
standing capital stock of any such corporation is pledged under the 
lien of this indenture, upon any such merger, consolidation, sale or con- 
veyance, a majority or more of the outstanding capital stock of such 
other corporation resulting from such merger or consolidation or to 
which such sale or conveyance shall be made, shall simultaneously be 
pledged under the lien of this indenture. 

In case of the consolidation of the Telephone Company with or the 
merger into it of a corporation, any of the capital stock of which shall 
be pledged under this indenture, or in case of the conveyance and trans- 
fer to the Telephone Company of all of the property of such corporation, 
and by such merger, consolidation, conveyance or transfer the property 
of such corporation is made subject to the lien of this indenture, the lien 
of this indenture upon such stock shall terminate upon such consolida- 
tlon or merger, or conveyance or transfer becoming effective, and any 
such capital stock, if then in the possession of the Trustee, shall be sur- 
rendered by it to the Telephone Company or to the successor corporation, 
upon the delivery to the Trustee of an opinion of counsel satisfactory 
to it (who may be counsel for the Telephone Company) that the prop- 
erty of such corporation acquired by the Telephone Company by such 
merger, consolidation, conveyance or transfer has become subject to 
the lien of this indenture. 

In case of the consolidation of the Telephone Company with or the 
merger into it of a corporation, any of the bonds or other evidences of 
indebtedness of which shall be pledged under this indenture, or in case 
of the conveyance and transfer to the Telephone Company of all of 
the property of such a corporation, the lien of this indenture thereon 
shall terminate upon such consolidation or merger or conveyance and 
transfer becoming effective, and such bonds or other evidences of in- 


368 APPENDIX I 


Article Seventh, Section 4; Article Eighth, Sections 1 and 2. 
debtedness, if then in the possession of the Trustee, shall be surrendered 
by it to the Telephone Company or to the successor corporation; pro- 
vided, however, that such lien shall not terminate, and such bonds or 
other evidences of indebtedness shall not be surrendered, unless or until 
the property of the corporation so consolidated with or merged into 
the Telephone Company or so conveyed and transferred to it shall have 
been subjected to the lien of this indenture, nor unless or until there 
are no outstanding bonds or other indebtedness secured by lien upon 
said property which lien is junior to the lien securing such bonds or 
other evidences of indebtedness held by the Trustee, and prior to the 
lien of this indenture. 

Section 4. For every purpose of this indenture, including the execu- 
tion, issue and use of any and all bonds hereby secured, the term ““Tele- 
phone Company” includes and means not only the party of the first 
part hereto but also any successor corporation. 


ARTICLE EIGHTH 


Concerning the Property Mortgaged. 


Section 1. Until default shall be made by the Telephone Company 
in the payment of the principal of or the interest upon the bonds issued 
hereunder, or any of them or some part thereof, according to the tenor 
and effect thereof; or until default shall be made in respect of some 
other act or thing in said bonds or herein required to be done, the Jele- 
phone Company shall be entitled to possess, manage, operate, use and 
enjoy, and be suffered and permitted to remain in the actual and un- 
disturbed possession of all and singular the property hereby mortgaged 
(other than bonds, certificates of stock, cash and other indebtedness 
pledged or to be pledged hereunder with the Trustee), and to receive, 
take and use the rents, income and profits thereof as if this indenture 
had not been made, with power in the ordinary course of business to 
use and consume the supplies and deal with the contracts and choses in 
action, and to alter, repair, change and add to its buildings, structures 
and any or all of its plant and equipment, and the appliances apper- 
taining to or used in connection with its telephone system, constructed 
or owned or hereafter constructed or acquired by the Telephone Com- 
pany, and conveyed or intended to be conveyed hereby to the Trustee. 


Section 2. As long as the Telephone Company shall remain in 
possession of the mortgaged premises and there shall be no continuing 
default under this mortgage, it may alter, remove, sell, exchange or 
otherwise dispose of such materials, appliances, instruments and other 
movable property as may become worn out or no longer be necessary 
or profitable for the use of the Telephone Company; provided it shall 
immediately renew the same or substitute other property therefor which 


FORM OF CORPORATE MORTGAGE 369 


Article Eighth, Section 3. 
in its judgment may be of the same or greater utility or value, so that 
such alteration, removal or disposition will not impair the security of 
the bonds issued hereunder; and it may also alter or remove any im- 
provements, buildings or other structures upon or under the surface 
of any lands, tenements or hereditaments constituting a part of the 
mortgaged premises, if such alteration or removal will, in its opinion, 
enable it to use its property to better advantage in the judicious and 
most profitable operation and management of its business; and the 
Telephone Company covenants that it will keep its system and property 
up to as high efficiency for practical and profitable operation in every 
respect as before such alteration or removal. 

As long as the Telephone Company shall remain in possession of the 
mortgaged premises and there shall be no continuing default under this 
mortgage, the Telephone Company may without any release by the 
Trustee sell, free from the lien of this indenture any physical real or 
personal property of any kind whatsoever, constituting a part of the 
mortgaged premises, which shall no longer be necessary or profitable 
for the use of the Telephone Company; provided that the total amount 
of the property which may be disposed of under the provisions of this 
paragraph during any calendar year shall not exceed in value $200,000; 
and provided further that any money realized from the sale of any such 
property shall be forthwith reinvested in property such as will upon its 
acquisition become subject to the lien of this mortgage. 

Section 3. As long as the Telephone Company shall remain in pos- 
session of the mortgaged premises and there shall be no continuing de- 
fault under this mortgage, the Trustee shall, upon request of the Tele- 
phone Company, evidenced by a certified copy of a resolution of its 
Board of Directors, convey by a release or otherwise to any person or 
corporation designated by the Telephone Company in such resolution, 
such lands, tenements and hereditaments as in the judgment of the Tele- 
phone Company, as determined by said resolution, shall no longer be 
necessary, useful or profitable in the operation and maintenance of the 
telephone system and business of the Telephone Company; provided 
that in each such case other lands, tenements or hereditaments of equal 
or greater value, in the judgment of the Telephone Company as de- 
termined by said resolution, be substituted for the property released 
and be subjected to the lien of this mortgage, so that such release will 
not injure the security provided by this mortgage. Nevertheless, in- 
stead of substituting other property for the property so released, the 
Telephone Company may sell the same for cash, or partly for cash and 
partly on time, the deferred payments to be secured by a first lien on 
the property sold. But such proceeds of sale shall be paid and delivered 
to the Trustee and shall be held by it as a part of the security provided 
by this mortgage. Such proceeds shall, upon request of the Telephone 


370 APPENDIX I 


Article Eighth, Section 4. 

Company evidenced by a certified copy of a resolution of its Board of 
Directors, be paid out by the Trustee only for the actual cash cost of 
additions to, or extensions of, or betterments and improvements of the 
telephone plant and system hereby mortgaged, upon a certificate or 
certificates to be furnished to the Trustee setting forth the facts re- 
ferred to in clauses (a) to (e), both inclusive, of paragraph (4) of 
Section 5 of Article Second hereof, and where real estate is acquired, 
an opinion of counsel as required in connection with the acquisition of 
real estate as provided in said paragraph; provided that the basis for 
payment shall be the full amount of such cost instead of only seventy- 
five per cent thereof. If the Telephone Company shall not within 
one year after the receipt of the cash proceeds of any such sale, re- 
quest the Trustee to apply the same as above authorized, the ‘Trustee 
may invest such cash proceeds, or any part thereof, in the purchase, on 
the best terms obtainable, but not exceeding the redemption price, of 
outstanding bonds of any series hereby secured, and upon such purchase 
shall cancel such bonds and all coupons thereto attached and deliver 
them to the Telephone Company, or may so invest such cash proceeds, 
or any part thereof, in other first mortgage bonds approved by the 
‘Telephone Company, and shall hold such bonds so purchased, subject 
to be sold with the consent of the Telephone Company from time to 
time and their proceeds reinvested as aforesaid. Any income collected 
on such bonds so purchased shall from time to time, as long as there 
shall be no default hereunder, be paid to the Telephone Company on 
demand by it. 

Section 4. As long as the Telephone Company shall remain in pos- 
session of the mortgaged premises and there shall be no continuing de- 
fault under this mortgage, the Trustee shall release from the lien of 
this mortgage any telephone exchange or exchanges, or any telephone 
line or lines, or plant, or any bond or bonds, or any stock or other 
securities, or any other property of any kind not coming under the 
provisions of Sections 2 and 3 of this Article Eighth, but constituting 
a part of the mortgaged premises, at any time upon the request of the 
‘Telephone Company evidenced by a certified copy of a resolution of its 
Board of Directors setting forth that the property, release of which is 
asked, is in the judgment of the Telephone Company no longer requisite 
or necessary or profitable in the operation and maintenance of the tele- 
phone system and business of the Telephone Company, and that the 
Telephone Company has sold, assigned and conveyed the same for a 
fair and adequate consideration, which shall be named in the resolu- 
tion. ‘The proceeds of such sale shall be paid to the Trustee and held 
by it as a part of the security of this mortgage. In case the consider- 
ation of such sale shall be in whole or in part other property, such 
property shall become subject to the lien of this mortgage. There 
shall also be presented and filed with the Trustee an affidavit of the 


FORM OF CORPORATE MORTGAGE 371 


Article Eighth, Sections 5 to 7. 
President or a Vice President and the Treasurer or an Assistant Treas- 
urer of the Telephone Company, setting forth the amount of the pur- 
chase price or consideration and that in their judgment the same was 
fair and adequate, and also a sworn certificate of a competent engineer, 
to be selected by the Telephone Company and approved by the Trustee, 
setting forth that in the judgment of such engineer the consideration 
agreed upon and received was fair and adequate. 

The cash proceeds of any such sale shall be held and disposed of by 
the ‘Trustee in the manner provided in Section 3 of this Article Eighth. 

Section 5. If under the provisions of any mortgage or deed of trust 
under which underlying bonds are issued, in case of a release of any 
portion of the mortgaged premises, there is required to be made with the 
trustees under such mortgage or deed of trust, a deposit of cash or pledge 
of securities received in payment for said property released, the Tele- 
phone Company shall not be required to deposit with the Trustee here- 
under such cash or securities to the extent that they may be required to 
be deposited with the trustees under said prior mortgages or deeds of 
trust; provided that any such deposits remaining with any of said 
trustees, upon the discharge and cancellation of said mortgages or deeds 
of trust, shall be redeposited with the Trustee hereunder and shall be 
held subject to the lien of this mortgage, or disposed of by the Trustee 
in the manner provided in Section 3 of this Article Eighth. 

Section 6. As long as the Telephone Company shall remain in pos- 
session of the mortgaged premises and there shall be no continuing 
default under this mortgage, the Telephone Company may from time 
to time deliver to the Trustee shares of the capital stock and/or bonds 
and/or notes of other corporations which represent interests in tele- 
phone properties, in exchange for any of the stock, bonds and/or notes 
then pledged with the Trustee hereunder, provided the securities given 
and received shall be exchanged at the value thereof at the time of such 
exchange, which value shall be determined by two arbitrators, one 
selected by the President, or a Vice President, or the Directors or 
Executive Committee of the Telephone Company, and one by the 
President, or a Vice President, or the Directors or Executive Com- 
mittee of the Trustee, and in case such arbitrators disagree, such value 
shall be so determined by a member of the New York Stock Exchange 
selected by said two arbitrators. In ascertaining such value the aver- 
age market value of such securities for the six months preceding such 
valuation may be regarded by said arbitrators as a controlling fact in 
all cases in which such securities are sold freely upon the market. Such 
arbitrators may be officers, directors or stockholders of the Telephone 
Company or the Trustee, or persons having no connection therewith. 


Section 7. In no case shall the franchise of the Telephone Com- 
pany to be a corporation be granted, sold, assigned or exchanged except 


372 , APPENDIX I 


Article Eighth, Section 8; Article Ninth, Sections 1 and 2. 

as in this indenture provided. No purchaser, grantee, assignee or vendee 
of any property under the provisions of this Article Eighth, and no 
one with whom any exchange as herein authorized shall be made, shall 
be or be held to be liable or responsible for the proper investment, 
whether by the Telephone Company or by the Trustee, of the moneys 
or other proceeds of any such grant, assignment, sale, exchange or other 
proceeding hereby authorized. 


Section 8. In case the mortgaged premises or any part thereof shall 
be in the possession of a receiver lawfully appointed, the powers in and 
by this Article Eighth conferred upon the Telephone Company may 
be exercised by such receiver with the approval of the ‘Trustee in respect 
to the property in the possession of such receiver, and if the Trustee 
shall be in possession of the mortgaged premises under any provisions 
of this indenture, then all the powers of this Article Eighth conferred 
upon the Telephone Company may be exercised by the Trustee in its 
discretion. 


ARTICLE NINTH 
Remedies of the Trustee and Bondholders. 


Section 1. In case any coupon or claim for interest’ on any of the 
bonds hereby secured shall have been funded or extended by or with 
the consent of the ‘Telephone Company, such coupon or claim for in- 
terest so funded or extended shall not be entitled, in case of default 
hereunder, to the benefit or security of this indenture, except subject to 
the prior payment in full of the principal of all of said bonds that shall 
be outstanding and of all coupons and claims for interest thereon that 
shall not have been so funded or extended. If any coupons or claims 
for interest on any of said bonds at or after maturity shall be owned 
by the Telephone Company, then such matured coupons or claims for 
interest shall not be entitled to the benefit or security of this indenture; 
and the ‘Telephone Company covenants that all such coupons and claims 
for interest so owned by it at or after their maturity shall promptly be 
canceled. 


Section 2. If one or more of the following events herein called 
“events of default” shall happen, that is to say: 


(a) default shall be made in the payment of any installment of in- 
terest on any bond or bonds issued hereunder when and as the same shall 
become payable as therein and herein expressed and such default shall 
continue for the period of ninety days; or 

(b) default shall be made in the payment of the principal of any 
bond or bonds issued hereunder when the same shall become due and 
payable either by the terms thereof or otherwise as herein provided; or 

(c) default shall be made in the observance or performance of any 


FORM OF CORPORATE MORTGAGE 373 


Article Ninth, Section 2. 
other of the covenants and conditions on the part of the Telephone 
Company in the bonds hereby secured or in this indenture contained 
and such default shall continue for the period of ninety days after writ- 
ten notice specifying such default shall have been given to the Tele- 
phone Company by the Trustee, which notice may be given by the 
Trustee in its discretion and shall be given on the written request of 


the holders of 25% in amount of the bonds hereby secured at the time 
outstanding; or 


(d) default shall be made in the payment of the interest on any 
bond or obligation outstanding and secured by any lien prior to that of 
this indenture on the trust estate or any part thereof and such default 
shall continue for the period of ninety days, or the Telephone Company 
shall fail at the maturity, whether by declaration or otherwise, of 
such bonds or obligations and on presentation thereof in accordance with 
the terms thereof, either to pay said bonds or obligations or to cause 
them to be taken up and delivered to the Trustee to be held under this 
indenture, or default shall be made in the performance of any covenant 
contained in any mortgage or other instrument of trust constituting a 
lien on any part of the trust estate in priority to this indenture, and by 
reason of such default any right of entry or right of action for the 
enforcement of the security afforded thereby shall accrue; or 


(e) a decree by a court having jurisdiction of the premises shall 
have been entered adjudging the Telephone Company a bankrupt and 
such decree shall have continued undischarged and unstayed for a 
period of ninety days; or an order of a court having jurisdiction in 
the premises for the appointment of a receiver of the property of 
the Telephone Company, or for the winding up or liquidation of its 
business or affairs, shall have been entered and such order shall have 
remained in force undischarged and unstayed for a period of ninety 
days; or the Telephone Company shall institute proceedings to be 
adjudicated a voluntary bankrupt or shall make an assignment for the 
benefit of creditors; 


then and in each and every such case the Trustee personally or by 
its agents or attorneys may enter into and upon all or any part of 
the trust estate, and may exclude the Telephone Company, its agents 
and servants wholly therefrom, and having and holding the same, may 
use, operate, manage and control the trust estate or any part thereof, 
and conduct the business thereof, either personally or by its superin- 
tendent, managers, receivers, agents and servants or attorneys, to the 
best advantage of the holders of the bonds hereby secured, and upon 
every such entry the Trustee, at the expense of the trust estate, from 
time to time may make all necessary or proper repairs, renewals, re- 
placements and useful or required alterations, additions, betterments 
and improvements to and on the trust estate as to it may seem judicious, 


374 APPENDIX I 


Article Ninth, Section 3. 

and may pay and satisfy all liens and charges thereon prior to the 
lien of this indenture, and may insure and keep insured any property 
subject to the lien of this indenture, and in such case the Trustee shall 
have the right to manage the trust estate and to carry on the business 
and exercise all rights and powers of the Telephone Company, either 
in the name of the ‘Telephone Company, or otherwise, as the Trustee 
shall deem best; and it shall be entitled to collect and receive all 
earnings, income, rents, issues and profits of the same and every part 
thereof. After deducting the expenses of operating said trust estate 
and of conducting the business thereof, and of all repairs, maintenance, 
renewals, replacements, alterations, additions, betterments, improve- 
ments and all payments which it may be required or may elect to make 
for taxes, assessments, insurance or prior or other proper charges on 
said trust estate, or any part thereof, as well as just and reasonable 
compensation for its own services, and for all agents, clerks and other 
employees, and for all attorneys and counsel by it properly engaged and 
employed, it shall apply the moneys arising as aforesaid as follows: 

In case the principal of the bonds hereby secured shall not have 
become due and be unpaid, to the payment of the interest in default, in 
the order of the maturity of the installments of such interest, with 
interest thereon at the same rate as is borne by the bonds upon which 
such interest is due; such payments to be made ratably to the persons 
entitled thereto without discrimination or preference. 

In case the principal of any of the bonds hereby secured shall have 
become due, by declaration or otherwise, and shall be unpaid, first to 
the payment of the accrued interest (with the interest on the overdue 
installments thereon at the same rate as is borne by the bonds on which 
such interest is due), in the order of the maturity of the installments 
of such interest, and then to the payment of the principal of all bonds 
hereby secured then due; in every instance such payments to be made 
ratably to the persons entitled to such payments without any discrimina- 
tion or preference. 

‘These provisions are, however, subject to the provisions of Section 1 
of this Article Ninth. 

Upon payment in full of whatever may be due for principal or 
interest, or both, as the case may be, and the expenses of the Trustee, 
and in case all other defaults have been made good and secured to the 
satisfaction of the Trustee, possession of the mortgaged property shall 
be returned to the Telephone Company or to whosoever shall be entitled 
thereto. . 

Section 3. In case one or more of the events of default shall happen 
and be continuing or if a receiver or the Trustee shall have entered 
into possession of the trust estate, the ‘[rustee shall be entitled to vote 
on all shares of stock then subject to the lien of this indenture, and, 


FORM OF CORPORATE MORTGAGE 375 


Article Ninth, Section 4. 
for the benefit of the holders of the bonds hereby secured, shall be 
entitled to collect and receive all dividends on all such shares of stock 
and all sums payable for principal, interest or otherwise upon any bonds 
or obligations that shall then be subject to this indenture and to apply, 
as hereinbefore in Section 2 of this Article Ninth provided, the net 
moneys received from income; and as holder of any such shares of 
stock and of any such bonds, to perform any and all acts or to make 
and execute any and all transfers, requests, requisitions or other instru- 
ments for the purpose of carrying out the provisions of this Section. 
In the event that a receiver of the property hereby mortgaged or con- 
veyed or pledged, or any part thereof, shall have been appointed and 
shall be in possession thereof, the Trustee from time to time in its dis- 
cretion may turn over any part or all of the moneys so collected and 
remaining in the hands of the ‘Trustee to such receiver and may co- 
operate with such receiver in managing and operating the mortgaged 
properties in such manner as the I'rustee shall deem for the best inter- 
est of the holders of the bonds secured by this indenture. 


Section 4. In case one or more of the events of default shall happen 
and shall be continuing, then during the continuance of such default, 
the Trustee may, and upon the written request of the holders of not 
less than 25% in amount of the bonds hereby secured then outstanding, 
the Trustee shall, by notice in writing delivered to the Telephone 
Company, declare the principal of all bonds hereby secured then out- 
standing to be due and payable immediately, anything in this indenture 
or in said bonds contained to the contrary notwithstanding. ‘This 
provision, however, is subject to the condition that if, at any time after 
the principal of said bonds shall have been so declared due and payable, 
all arrears of interest upon all such bonds with interest on overdue 
installments of interest at the same rate or rates as the bonds upon 
which such interest is in default bear, and the principal of any bonds 
which shall have become due by their terms, and the expenses of the 
‘Trustee, shall either be paid by the Telephone Company, or be col- 
lected out of the trust estate before any sale of the trust estate shall 
have been made, and all other defaults made good or secured to the 
satisfaction of the Trustee, then and in every such case the holders 
of a majority in amount of the bonds hereby secured then outstanding, 
by written notice to the Telephone Company and to the Trustee, may 
waive such default and its consequences; but no such waiver shall 
extend to or affect any subsequent default or impair any right consequent 
thereto. ! 

In case the Trustee shall have proceeded to enforce any right under 
this indenture by foreclosure, entry or otherwise and such proceedings 
shall have been discontinued or abandoned because of such waiver or 
for any other reason or shall have been determined adversely to the 


376 APPENDIX I 


Article Ninth, Section 5. 

Trustee, then and in every such case the Telephone Company and the 
Trustee shall be restored to their former position and rights hereunder 
in respect of the trust estate, and all rights, remedies and powers of the 
Trustee shall continue as though no such proceedings had been taken. 


Section 5. If one or more of the events of default shall happen and 
shall be continuing, the Trustee may, and upon the written request of 
the holders of not less than 25% in amount of the bonds hereby secured, 
and upon being indemnified as hereinafter provided, shall, with or 
without entry, personally or by attorney, in its discretion, sell to the 
highest bidder all and singular the trust estate, property and premises, 
rights, franchises and interest and appurtenances and either real and 
personal property of every kind, and all right, title, interest, claim and 
demand therein, and right of redemption thereof, in one lot and as an 
entirety, unless a sale in parcels shall have been requested by the holders 
of a majority in amount of the bonds hereby secured, then outstanding, 
in which case the sale shall be made in such parcels as shall be specified 
in such request, or unless such sale as an entirety is impracticable by 
reason of some statute or some other cause, which sale or sales shall be 
made at public auction, at such place in the City of New York in the 
State of New York, or at such other place as may be required by law, 
at such time and upon such terms as the Trustee may fix and briefly 
specify in the notice of sale to be given as herein provided; or proceed 
to protect and enforce its rights and the rights of the holders of bonds 
secured by this indenture, by a suit or suits at law or in equity, whether 
for the specific performance of any covenant or agreement contained 
herein, or in aid of the execution of any power herein granted, or for 
the foreclosure of this indenture, or for the enforcement of any other 
proper legal or equitable remedy, as the Trustee, being advised by 
counsel learned in the law, shall deem most expedient in the interests 
of the holders of the bonds hereby secured. In case the Trustee shall 
proceed by suit or suits at law or in equity for the foreclosure of this 
indenture, as above provided, the said Trustee shall be entitled to have 
the mortgaged and pledged property, rights and franchises, of every 
description hereby mortgaged and pledged or intended so to be, sold 
at judicial sale under the order of any court or courts of competent 
jurisdiction, for or toward the satisfaction of the principal or interest 
or both due and owing to the holders of the bonds and coupons then 
outstanding, issued under or entitled to the benefit of the security of 
this indenture, and for the enforcement of the rights, liens and securities 
of the Trustee and the holders of such bonds and coupons, and shall be 
entitled, pending any such suit or proceeding, to a receivership of all 
the property, rights and franchises subject to the lien hereof, and all 
the tolls, earnings, revenues, issues, profits and income thereof. 

Upon the happening of one or more of the events of default and the 


FORM OF CORPORATE MORTGAGE 377 


Article Ninth, Sections 6 to 8. 


commencement thereafter of judicial proceedings to enforce any legal or 
equitable remedy under this indenture, all moneys held by the Trustee 
hereunder shall be deemed to be held without distinction as between 
any of the amounts constituting such moneys, for the sole purpose of 
paying the principal of and interest upon the bonds secured by this 
indenture, and upon any sale, whether under the power of sale herein 
contained or pursuant to judicial proceedings, shall be applied as pro- 
vided in Section 10 of this Article Ninth. 


Section 6. Notice of any such sale pursuant to any provisions of this 
indenture, shall state the time when, and the place where, the same is 
to be made, and, shall contain a brief general description of the property 
to be sold, and shall be sufficiently given if published once in each week 
for four successive weeks prior to such sale, in a newspaper published 
in the Borough of Manhattan, City of New York, and in a newspaper 
published in the City of Philadelphia, Pennsylvania, and in such other 
manner as may be required by law. 

Section 7. From time to time the Trustee may adjourn any sale to 
be made by it under the provisions of this indenture, by announcement 
at the time and place appointed for such sale, or for such adjourned 
sale or sales; and without further notice or publication, the ‘Trustee 
may make such sale at the time and place to which the same shall be 
so adjourned. 

Section 8. Upon the completion of any sale or sales under this 
indenture, the Trustee shall execute and deliver to the accepted pur- 
chaser or purchasers a good and sufficient deed or deeds of conveyance 
of the property and franchises sold; and the Trustee and its successors 
are hereby appointed the true and lawful attorney and attorneys, irrev- 
ocable, of the Telephone Company, in its name and stead, to make all 
necessary deeds and conveyances of the property thus sold; and for that 
purpose it and they may execute all necessary deeds and instruments 
of assignment and transfer, the Telephone Company hereby ratifying 
and confirming all that its said attorney or attorneys shall lawfully 
do by virtue hereof. Nevertheless, the Telephone Company shall, if so 
requested by the Trustee, ratify such sale by executing and delivering 
to the Trustee or to such purchaser or purchasers as may be designated 
in such request, any such instruments as, in the judgment of the Trustee, 
may be advisable. 

Any such sale or sales made under or by virtue of this indenture, 
whether under the power of sale herein granted, or pursuant to judicial 
proceedings, shall operate to divest all right, title, interest, claim and 
demand whatsoever, either at law or in equity, of the Telephone Com- 
pany, in and to the premises and property so sold, and shall be a per- 
petual bar both at law and in equity against the Telephone Company, 
its successors and assigns, and against any and all persons claiming or 


378 _ APPENDIX I 


Article Ninth, Sections 9 and 10. 


to claim the premises and property sold, or any part thereof, from, 
through or under the Telephone Company, its successors or assigns. 

The receipt of the Trustee or of the Court officer conducting any 
such sale shall be full and sufficient discharge to any purchaser of the 
property or any part thereof sold as aforesaid for the purchase money; 
and no such purchaser or his representatives, grantees or assigns, after 
paying such purchase money and receiving such receipt, shall be bound 
to see to the application of such purchase money upon or for any trust 
or purpose of this indenture, or in any manner whatsoever be answerable 
for any loss, mis-application or non-application of any such purchase 
money or any part thereof, or be bound to inquire as to the authoriza- 
tion, necessity, expediency or regularity of any such sale. 


Section 9. In case of any such sale, whether made under the power 
of sale hereby granted or pursuant to judicial proceedings, the whole 
of the principal sums of the bonds hereby secured, if not previously due, 
shall at once become due and payable, anything in said bonds or in this 
indenture to the contrary notwithstanding. 


Section 10. The purchase money, proceeds and avails of any such 
sale, whether made under the power of sale hereby granted or pursuant 
to judicial proceedings, together with any other sums which then may 
be held by the Trustee as part of the trust estate, shall be applied as 
follows: 

First, to the payment of the costs and expenses of such sale, including 
a reasonable compensation to the Trustee, its agents, attorneys and 
counsel, and of all expenses, liabilities and advances made or incurred 
by the Trustee in managing and maintaining the property hereby con- 
veyed, and to the payment of all taxes, assessments or liens prior to the 
lien of this indenture, except any taxes, assessments, or other superior 
liens to which said sale shall have been made subject. 

Second, to the payment of the whole amount then owing or unpaid 
upon the bonds and coupons hereby secured for principal and interest, 
with interest on the principal and the overdue installments of interest 
at the same rate or rates respectively as were borne by the respective 
bonds; and in case such proceeds shall be insufficient to pay in full the 
whole amount so due and unpaid upon the said bonds, then to the 
payment of such principal and interest, without preference or priority 
of principal over interest, or of interest over principal, or of any install- 
ment of interest over any other installment of interest, ratably to the 
aggregate of such principal and the accrued and unpaid interest, sub- 
ject, however, to the provisions of Section 1 of this Article Ninth. Such 
payments shall be made on the date fixed therefor by the Trustee, upon 
presentation of the several bonds and coupons and stamping thereon 
the amount paid, if such bonds and coupons be only partly paid, and 
upon surrender thereof if fully paid. 


FORM OF CORPORATE MORTGAGE 379 


Article Ninth, Sections 11 to 13. 

Third, the payment over of the surplus, if any, to the Telephone 

Company, its successors or assigns, or to whosoever may be lawfully 
entitled to receive the same. 


Section 11. Upon any sale as aforesaid, any purchaser, for the pur- 
pose of making settlement or payment for the property purchased, shall 
be entitled to use and apply any bonds issued hereunder and then out- 
standing, and any matured and unpaid interest obligations thereon, by 
presenting the same so that there may be credited, as paid thereon, the 
sums payable out of the net proceeds of such sale to the holders of such 
bonds and such interest obligations, as his ratable share of such net 
proceeds, after allowing for the proportion of the total purchase price 
required to pay the costs and expenses of the sale, compensations and 
other charges; and thereupon such purchaser shall be credited on account 
of such purchase price payable by him, with the portion of such net 
proceeds that shall be applicable to the payment of, and that shall have 
been credited upon, the bonds and coupons so turned in, and at any such 
sale the Trustee or any bondholders may bid for and purchase such 
property, may make payment on account thereof as aforesaid, and upon 
compliance with the terms of sale, may hold, retain and dispose of such 
property without further accountability therefor. 


Section 12. The Telephone Company will not at any time insist 
upon or plead, or in any manner whatever claim or take the benefit 
or advantage of, any stay or extension law now or at any time hereafter 
in force; nor will it claim, take or insist on any benefit or advantage 
from any law now or hereafter in force providing for the valuation or 
appraisement of the property hereby mortgaged or conveyed or pledged, 
or any part thereof, prior to any sale or sales thereof to be made pursuant 
to any provision herein contained or to the decree of any court of 
competent jurisdiction; nor after any such sale or sales will it claim 
or exercise any right conferred by any statute to redeem the property 
so sold, or any part thereof, nor will it after such sale, if at the time 
of such sale it shall be in possession of the property so sold, claim or 
exercise any right under any law whatever to retain possession thereof, 
or to collect, receive or have the benefit of any rent, issues or profits 
thereof, for or during any subsequent period of redemption provided 
for by any law; and it hereby expressly waives all benefit and advantage 
of such law or laws and covenants that it will not hinder, delay or 
impede the execution of any power herein granted and delegated to the 
Trustee, but that it will suffer and permit the execution of every such 
power as though no such law or laws had been made or enacted. 


Section 13. “The Telephone Company covenants that (1) in case 
default shall be made in the payment of any interest on any bond or 
bonds at any time outstanding and secured by this indenture, and such 
default shall have continued for the period of ninety days, or (2) in 


380 APPENDIX I 


Article Ninth, Section 13. 


case default shall be made in the payment of the principal of any such 
bond or bonds when the same shall become payable, whether upon the 
maturity of said bonds, or upon declaration or otherwise, then, upon 
demand of the Trustee, the Telephone Company will pay to the Trus- 
tee, for the benefit of the holders of the bonds and coupons hereby 
secured, then outstanding, the whole amount that then shall have become 
due and payable on all such bonds and coupons then outstanding, for 
interest or principal, or both, as the case may be, with interest upon 
the overdue principal and installments of interest at the same rates 
respectively as were borne by the respective bonds whereof the principal 
or installments of interest shall be overdue; and in case the Telephone 
Company shall fail to pay the same forthwith upon such demand, the 
Trustee, in its own name and as the trustee of an express trust, shall 
be entitled to recover judgment against the Telephone Company for 
the whole amount so due and unpaid. 

The Trustee shall be entitled to recover judgment as aforesaid, either 
before or after or during the pendency of any proceedings for the en- 
forcement of the lien of this indenture, and the right of the Trustee 
to recover such judgment shall not be affected by any entry or sale 
hereunder, or by the exercise of any other right, power or remedy for 
the enforcement of the provisions of this indenture or the foreclosure 
of the lien hereof; and in case of a sale of the mortgaged or pledged 
property or any part thereof, the Trustee, in its own name and as 
trustee of an express trust, shall be entitled to enforce payment of, 
and to receive, all amounts then remaining due and unpaid upon any 
and all of the bonds and coupons then outstanding hereunder for the 
benefit of the holders thereof, and shall be entitled to sue for and 
recover judgment for any portion of the said debt remaining unpaid, 
with interest. No recovery of any such judgment by the Trustee, and 
no levy of any execution upon property subject to the lien of this 
indenture, or upon any other property, shall in any manner, or to any 
extent, affect the lien of this indenture upon the property, or any part 
thereof, subject to this indenture, or any lien, rights, powers or remedies 
of the Trustee hereunder, or any lien, rights, powers or remedies of 
the holders of the bonds, but such lien, rights, powers and remedies 
shall continue unimpaired as before. 

Any moneys thus collected by the Trustee under this Section shall 
be applied by the Trustee, first, to the payment of the expenses, dis- 
bursements and compensation of the Trustee, its agents and attorneys, 
and, second, toward the payment of the amounts then due and unpaid 
upon such bonds and coupons, in respect of or for the benefit of which 
such moneys shall have been collected ratably, and without any prefer- 
ence or priority of any kind, except as provided in Section 1 of this 
Article Ninth, according to the amounts due and payable upon such 


FORM OF CORPORATE MORTGAGE 381 


Article Ninth, Sections 14 and 15. 
bonds and coupons, respectively, at the date fixed by the Trustee for the 
distribution of such moneys, upon presentation of the several bonds and 
coupons and stamping thereon such payment, if only partially paid, and 
upon surrender thereof, if fully paid. 


Section 14. Upon filing a bill in equity or upon other commencement 
of judicial proceedings by the Trustee to enforce any right under this 
indenture, the Trustee shall be entitled to exercise the right of entry, 
and also any and all rights and powers herein conferred and provided 
to be exercised by the Trustee upon the occurrence and continuance 
of any default as hereinbefore in Section 2 of this Article Ninth pro- 
vided; and as a matter of right, the Trustee shall be entitled to the 
appointment of a receiver of the premises hereby mortgaged, and of the 
earnings, revenue, rents, issues, profits and other income thereof and 
therefrom, with all such powers as the court or courts making such 
appointment shall confer; but notwithstanding the appointment of any 
receiver the Trustee shall be entitled, as pledgee, to continue to retain 
possession and control of any stocks, bonds, cash and indebtedness 
pledged or deposited or provided to be pledged or deposited with the 
‘Trustee hereunder. 


Section 15. No holder of any bond or coupon issued hereunder shall 
have any right to institute any suit, action or proceeding in equity or 
at law for the foreclosure of this indenture, or for the appointment of a 
receiver, or for the execution of any trust hereunder, or for any other 
remedy hereunder, unless the holders of not less than 25% in amount 
of the bonds hereby secured and then outstanding shall have requested 
the Trustee in writing to take action in respect of the matter complained 
of, and shall have afforded to it a reasonable opportunity to exercise 
the powers hereinbefore granted, or to institute such action, suit or 
proceeding in its own name; nor unless also they shall have offered to 
the Trustee security and indemnity satisfactory to it against the costs, 
expenses and liabilities to be incurred therein or thereby; nor unless the 
Trustee shall have refused or neglected to act on such notice, request 
and indemnity, and such notification, request and offer of indemnity 
are hereby declared, in every such case at the option of the Trustee, 
to be conditions precedent to the execution of the powers and trusts 
of this indenture and to any action or causes of action for foreclosure 
or for the appointment of a receiver, or for any other remedy hereunder; 
it being understood and intended that no one or more holders of bonds 
and coupons shall have any right, in any manner whatever, by his or 
their action, to affect, disturb or prejudice the lien of this indenture, or 
to enforce any right hereunder except in the manner herein provided; 
and that all proceedings at law or in equity shall be instituted, had and 
maintained in the manner herein provided, and for the equal benefit of 
all holders of such outstanding bonds and coupons. 


382 APPENDIX I 


Article Ninth, Sections 16 to 19. 


Any rights of action under this indenture may be enforced by the 
‘Trustee without the possession of any of the bonds or coupons hereby 
secured or the production thereof on the trial or other proceedings 
relative thereto,~and any such suit or proceedings instituted by the 
Trustee shall be brought in its own name, and any recovery of judgment 
shall be for the ratable benefit of the holders of said bonds and coupons. 


Section 16. Except as herein expressly provided to the contrary, no 
remedy herein conferred upon or reserved to the Trustee or to the 
holders of bonds issued hereunder is intended to be exclusive of any 
other remedy, but each and every such remedy shall be cumulative and 
shall be in addition to every other remedy given hereunder, or now 
or hereafter existing at law or in equity or by statute. 

Section 17. No delay or omission of the Trustee, or of any holder 
of bonds issued hereunder, to exercise any right or power accruing upon 
any default continuing as aforesaid, shall impair any such right or 
power, or shall be construed to be a waiver of any such default or an 
acquiescence therein, and every power and remedy given by this Article 
Ninth to the Trustee or to the bondholders, subject to the provisions of 
Section 15 of this Article Ninth, may be exercised from time to time 
and as often as may be deemed expedient by the Trustee or by the 
bondholders. 

Section 18. The Trustee shall have power to institute and to main- 
tain such suits and proceedings as it may be advised shall be necessary 
or expedient to prevent any impairment of the security hereunder by 
any acts of the Telephone Company, or of others, in violation of this 
indenture, or unlawful or as the Trustee may be advised shall be neces- 
sary or expedient to preserve and to protect its interests and the interests 
of the bondholders in respect of the property subject to this indenture, 
and in respect of the income, earnings, issues and profits arising there- 
from; including power to institute and to maintain suits or proceedings 
to restrain the enforcement of, or compliance with, or.the observance 
of, any legislative or other governmental enactment, rule or order that 
may be unconstitutional or otherwise invalid, if the enforcement of, 
compliance with or observance of such enactment, rule or order would 
impair the security hereunder or be prejudicial to the interests of the 
bondholders or of the Trustee. 


Section 19. Anything in this indenture to the contrary notwith- 
standing, in case several series of bonds be outstanding under this inden- 
ture and an event of default shall have happened because of any default 
in the payment of the principal or interest or any sinking fund install- 
ment in respect of the bonds of any one or more of such series and not 
in respect of the bonds of one or more others, then whatever action in 
this Article Ninth of this indenture it is provided may or shall be taken 
upon such default (continuing as in this indenture provided) by or 


FORM OF CORPORATE MORTGAGE 383 


Article Ninth, Section 20; Article Tenth, Sections 1 and 2. 


upon the request of the holders of a specified percentage of bonds out- 
standing, may be or shall be taken, in respect of the bonds of the series 
in respect of which such default shall have been made, by or upon the 
request of the holders of a majority in amount of the outstanding bonds 
of such series upon which such default shall have occurred. 

Section 20. No recourse under or upon any obligation, covenant or 
agreement contained in this indenture or under or upon any indebted- 
ness hereby secured or because of the creation thereof, shall be had 
against any incorporator, stockholder, officer or director of the Tele- 
phone Company or of any successor corporation, directly or through 
the Telephone Company or through a receiver or a trustee in bank- 
ruptcy, by the enforcement of any assessment or penalty, or by any 
legal or equitable proceedings, by virtue of any constitution, rule of 
law or otherwise; it being expressly agreed and understood that this 
indenture and all the bonds and obligations hereby secured are solely 
corporate obligations, and that no personal liability whatever does, or 
shall attach to or be incurred by the incorporators, stockholders, officers 
or directors of the ‘’elephone Company or of any successor corporation 
or any of them, because of the incurring of the indebtedness hereby 
authorized, or under or by reason of any of the obligations, covenants 
or agreements contained in this indenture or in any of the bonds or 
coupons hereby secured or implied therefrom; and any and all personal 
liability of every name and nature, either at common law or in equity, 
or created by statute or constitution, of every such incorporator, stock- 
holder, officer or director on this indenture and on such bonds and 
coupons, is hereby expressly released and waived, as a condition of, and 
as part of the consideration for, the execution of this indenture and the 
issue of the bonds and coupons hereby secured. 


ARTICLE TENTH 
Evidence of Rights of Bondholders. 


Section 1. Any request or other instrument required by this inden- 
ture to be signed and executed by bondholders, may be in any number 
of concurrent instruments of similar tenor and may be signed or exe- 
cuted by such bondholders in person or by agent appointed in writing. 
Proof of execution of any such request or other instrument, or of a 
writing appointing any such agent, and of the holding by any person 
of coupon bonds transferable by delivery, shall be sufficient for any 
purpose of this indenture, and may be received by the Trustee as con- 
clusive if made in the manner provided in this Article Tenth. 

Section 2. ‘The fact and date of the execution by any person of 
such request, instrument or other writing may be proved by the certifi- 
cate of any notary public, or other officer of any jurisdiction authorized 
by the laws thereof to take acknowledgments of deeds to be recorded 


384 APPENDIX I 


Article Tenth, Section 3; Article Eleventh, Section 1. 
in any state within the United States, certifying that the person signing 
such request or other instrument acknowledged to him the execution 
thereof, or by the afhdavit of a witness to such execution. 


Section 3. The aggregate amount of coupon bonds transferable by 
delivery held by any person executing any such request or other instru- 
ment as a bondholder, and the distinctive numbers of such bonds and 
the date of his holding the same, may be proved by a certificate executed 
by any trust company, bank, banker or other depositary (wherever 
situated), if such certificate shall be deemed by the Trustee to be satis- 
factory, showing that at the date therein mentioned such person had 
on deposit with such depositary, or exhibited to it, the bonds therein 
described, or such facts may be proved by the certificate or affidavit 
of the person executing such request or other instrument as a bond- 
holder, if any such certificate or instrument shall be deemed by the 
Trustee to be satisfactory. The fact and date of execution of any 
request or other instrument, and the amount and numbers of coupon 
bonds held by the person so executing such request or other instrument, 
may also be proved in any other manner which the Trustee may deem 
sufficient. 

The ownership of registered coupon bonds or of registered bonds 
without coupons shall be proved by the registers of such bonds. 


ARTICLE ELEVENTH 


Concerning the Trustee. 


Section 1. The Trustee, for itself and its successors, accepts the 
trusts of this indenture and agrees to execute them, but only upon the 
following additional terms and conditions, to which the ‘Telephone 
Company and the holders of the bonds hereby secured agree, to wit: 


(a) The Trustee shall be under no obligation to see to the recording, 
registry or filing of this indenture, but the Telephone Company cove- 
nants that it will with all convenient speed cause this indenture to be 
duly recorded as a mortgage and will do all other things requisite to 
preserve, protect and continue the lien hereof; and the Trustee may 
authenticate and deliver bonds before any such recording, registry or 
filing. | 

(b) The Trustee shall be entitled to reasonable compensation (which 
shall not be limited to the compensation of trustees of any express trust 
as provided by law) for all services rendered by it in the case of the 
trusts hereby created, and shall have a lien upon the trust estate under 
this indenture, prior to the rights of the holders of the bonds secured 
hereby, for such compensation and for its reasonable expenses and coun- 
sel fees. “The Telephone Company agrees to pay such compensation, 
as well as all expenses necessarily incurred or disbursed by the Trustee 


FORM OF CORPORATE MORTGAGE 385 


Article Eleventh, Section 1. 
hereunder, from time to time on request of the Trustee, and to indem- 
nify the Trustee against any liability or damages incurred or sustained 
by it under this indenture; and the Trustee shall have a lien upon the 
trust estate under this indenture prior to the rights and claims of the 
holders of the bonds secured hereby, for any such liability or damage 
and the reimbursement thereof. 

(c) The Trustee shall be protected in acting upon any notice, re- 
quest, consent, certificate, bond or other paper or document believed 
by it to be genuine and to have been signed by the proper party or 
parties, and any action taken by the Trustee pursuant to this indenture 
upon any notice, request, authority or consent of any person who, at 
the time of making such request or giving such authority or consent 
is the owner of any bonds secured hereby, shall be conclusive and bind- 
ing upon all future owners of the same bond and all bonds issued in 
exchange therefor or in place thereof. 

(d) The Trustee shall not be answerable for the default or mis- 
conduct of any agent or attorney appointed by it in pursuance hereof, 
if such agent or attorney shall have been selected with reasonable care; 
nor for the exercise of any discretion or power hereunder, nor for any- 
thing whatever in connection with this trust, except wilful misconduct 
or gross negligence; nor shall the Trustee be accountable for the use 
of any bonds authenticated or delivered by the Trustee hereunder or 
any of the proceeds of such bonds. ‘The Trustee shall not be under 
any obligation to take any action towards the execution or enforcement 
of the trusts hereby created, which, in its opinion, shall be likely to 
involve it in expense or liability unless one or more of the holders of 
the bonds hereby secured shall, as often as required by the ‘Trustee, 
furnish it indemnity satisfactory to it against such expense or liability. 
The Trustee shall not be required to take notice of any default under 
this indenture and for all purposes it conclusively may assume that 
there has been no default under this indenture, unless and until notified 
in writing of such default by the holders of at least 25% in amount 
of the bonds hereby secured then outstanding, nor shall the Trustee 
be required to take any action in respect of any default unless requested 
to take such action in respect thereof by a writing signed by the holders 
of not less than 25% in amount of the bonds hereby secured then 
outstanding, and tendered indemnity satisfactory to it as aforesaid; 
but the foregoing provisions are intended only for the protection of the 
Trustee, and shall not affect any discretion or power by any provision 
of this indenture given to the Trustee to take action in respect of any 
default, without such notice or request from the bondholders. Except 
as herein expressly otherwise provided, the Trustee shall not be bound 
to recognize any person as a bondholder unless or until his bonds are 


386 APPENDIX I 


Article Eleventh, Section 1. 


submitted to the Trustee for inspection, if required, and his title, if 
disputed, established to the satisfaction of the ‘Trustee. 

(e) The Trustee may, at the expense of the elephone Company, 
advise with counsel, and any action under this indenture taken or 
suffered in good faith by it in accordance with the opinion of such 
counsel shall constitute full protection to the I'rustee. 

(f) The Trustee may perform its powers and duties by or through, 
and may select and employ in and about the execution of this trust, 
attorneys, agents and servants whose reasonable compensation shall be 
paid by the Telephone Company, and in default of such payment shall 
be a charge upon the trust estate and the proceeds thereof, paramount 
to the rights and claims of the holders of the bonds hereby secured. 

(g) It shall be no part of the duty of the Trustee to see to the insur- 
ance of any property hereby conveyed or assigned, or to effect such an 
insurance, or to see to the payment of any tax, assessment or other 
governmental charge which may be levied upon or imposed against it 
or against the Telephone Company, or against the property hereby 
mortgaged, or against the owners of the said bonds, or, except as in this 
indenture provided, to see to the performance or observance of any of 
the covenants or agreements hereof on the part of the Telephone 
Company. 

(h) On any moneys held by the Trustee under any provision of 
this indenture, including any moneys in the sinking fund, the Trustee 
shall, until it is required to pay out the same under the provisions of 
this indenture, allow the Telephone Company interest at such rate, 
if any, as is customarily allowed by it on similar deposits. So long 
as there shall exist no default in the payment of the principal or interest 
of the bonds outstanding hereunder, all interest allowed on any such 
moneys shall be paid from time to time to the Telephone Company, 
or upon its order, signed by its president or any vice president or 
treasurer. 

(i) The recitals of facts and the covenants and agreements in this 
indenture and in said bonds contained shall be taken as made by the 
‘Telephone Company alone, and shall not be construed as made by or as 
imposing any obligation or liability upon the Trustee. 

(j) The Trustee shall not be responsible for the execution or validity 
hereof, or of the bonds issued hereunder or intended to be secured 
hereby, nor for the sufficiency of the security provided herein. 

(k) The Trustee may become the owner of bonds and coupons 
secured hereby with the same rights it would have if it were not 
‘Trustee. 

(1) The Trustee shall not be individually liable for any debt con- 
tracted by it or for the expenses of operating the business of the Tele- 
phone Company or for damages to person or property or for salaries 


FORM OF CORPORATE MORTGAGE 387 


Article Eleventh, Sections 2 and 3. 
or for nonfulfillment of contracts or for any other torts, obligations 
and liabilities arising during any period wherein the Trustee shall 
manage the trust property, or any part thereof, upon entry, as aforesaid 
or otherwise, and the trust estate is hereby charged with a first and 
paramount lien in favor of the Trustee for its security and indemnifica- 
tion against any such liability. 

(m) In all cases where this indenture does not make other express 
provision as to the evidence upon which the Trustee may act or refrain 
from acting, the Trustee shall be protected in acting or refraining from 
acting under any provision of this indenture, in reliance upon a certifi- 
cate as to the existence or non-existence of any fact or facts, signed 
by the President or a Vice President of the Telephone Company and 
by its Treasurer or Secretary or Assistant Secretary, and sealed with 
its corporate seal. 


Section 2. The Trustee may resign and be discharged of the trusts 
created by this indenture by giving written notice thereof to the Tele- 
phone Company, specifying the date when such resignation shall take 
effect, and by publishing such notice at least once a week for four suc- 
cessive weeks in two newspapers published in the Borough of Man- 
hattan, City of New York; and such resignation shall take effect on 
the date specified in such notice. 

The Trustee may be removed at any time by an instrument in writing 
under the hands of the holders of three-fourths in amount of the bonds 
hereby secured then outstanding. 


Section 3. In case at any time the Trustee, or any trustee hereafter 
appointed, shall resign or be removed or otherwise become incapable 
of acting a successor may be appointed by the holders of a majority 
in arnount of the bonds:hereby secured and then outstanding, by an 
instrument or concurrent instruments signed by such bondholders or 
their attorneys in fact duly authorized; provided, nevertheless, that in 
case at any time there shall be a vacancy in the office of trustee here- 
under the Telephone Company by an instrument executed by order 
of its Board of Directors may appoint a trustee which shall act until 
a successor trustee shall be appointed by the bondholders as herein 
authorized. After any such appointment by the Telephone Company 
it shall publish notice thereof at least once a week for four successive 
weeks in two newspapers published in the Borough of Manhattan, 
City of New York, and any Trustee so appointed by the Telephone 
Company shall immediately and without further act be superseded 
by the trustee, appointed in the manner above provided by the holders 
of a majority in amount of the bonds then outstanding hereunder, if 
such appointment by such bondholders be made prior to the expiration 
of one year after the completion of such publication of notice. Any 
new trustee appointed hereunder shall execute an instrument accepting 


388 APPENDIX I 


Article Eleventh, Section 4. 


such appointment hereunder and deliver one counterpart thereof to the 
Telephone Company and one counterpart thereof to the Trustee last 
in office, and thereupon such new trustee without further act, deed 
or conveyance shall become vested with all the estates, properties, pow- 
ers and trusts of its predecessors in the trusts hereunder, with like 
effect as if originally named as trustee herein; but nevertheless, upon 
the written request of the successor trustee or of the Telephone Com- 
pany, the trustee ceasing to act shall execute and deliver an instru- 
ment transferring to such successor trustee, upon the trusts herein 
expressed, all the estates, properties, rights, powers and trusts of the 
trustee so resigning or removed, and shall duly assign, transfer and 
deliver any other property and money held by such trustee to the 
successor trustee so appointed in its place. Should any deed, conveyance 
or instrument in writing from the Telephone Company be required 
by any new trustee for more fully and certainly vesting in and con- 
firming to it such estates, rights, powers and duties, then, any and all 
such deeds, conveyances and instruments in writing, shall, on request 
of said new trustee, be made, executed, acknowledged and delivered 
by the ‘Telephone Company. 

Every such successor trustee appointed in place of the party of the 
second part hereto or its successor in the trust, shall be a bank or trust 
company having an office in the Borough of Manhattan, City of New 
York, in good standing and having a capital and surplus aggregating 
five million dollars if there be such a bank or trust company qualified, able 
and willing to accept the trusts upon reasonable or customary 
terms. 

Section 4. Any company into which the Trustee may be merged or 
with which it may be consolidated, or any company resulting from any 
merger or consolidation to which the Trustee shall be a party, shall be 
the successor of the Trustee hereunder without the execution or filing 
of any paper or any further act on the part of any of the parties hereto, 
anything herein to the contrary notwithstanding, provided such com- 
pany shall be a corporation organized under the laws of the State of 
New York and shall maintain an office in the Borough of Manhattan 
in the City of New York. In case any of the bonds issuable under 
this indenture shall have been authenticated but not delivered, any 
such successor trustee may adopt the certificate of authentication of 
National Trust Company of New York or of any successor to it as 
trustee hereunder, and deliver the same so authenticated, and in case 
any of the bonds issuable hereunder shall not have been authenticated 
any successor trustee may authenticate such bonds in the name of such 
successor trustee and in all such cases such authentication shall have the 
full force and effect which anywhere in said bonds or in this indenture 
it is provided that authentication of the Trustee shall have. 


FORM OF CORPORATE MORTGAGE 389 


Article Twelfth; Article Thirteenth, Section 1. 
ARTICLE TWELFTH 
Supplemental Indentures. 


Section 1. The Telephone Company, when authorized by resolution 
of its Board of Directors, and the Trustee, from time to time and at any 
time, may enter into an indenture or indentures supplemental hereto and 
which thereafter shall form a part hereof, for any one or more of the 
following purposes: 


(a) to convey, transfer and assign to the Trustee and to subject to 
the lien of this indenture, with the same force and effect as though 
specifically mentioned in the granting clause hereof, additional property 
then owned by the Telephone Company, acquired by it through con- 
solidation, merger, by purchase, or otherwise; 

(b) to specify and state the mortgage indebtedness, and the amount 
thereof of any company which hereafter shall be consolidated with or 
merged into, or whose property hereafter shall be acquired by, the 
Telephone Company, which indebtedness, if secured by mortgage on 
property made subject to the lien of this indenture, and if prior to 
the lien of the bonds issued hereunder, is to be regarded as forming a 
part of the underlying bonds of the ‘Telephone Company, to retire 
which, at or before maturity, bonds may be issued as provided in Sec- 
tion 4 of Article Second hereof; 

(c) to add to the limitations on the authorized amount, date of 
maturity, issue and purposes of issue of bonds hereunder or of any 
series of bonds hereunder, other limitations to be thereafter observed ; 

(d) to evidence the succession of another corporation to the Tele- 
phone Company, or successive successions, and the assumption by a 
successor corporation of the covenants and obligations of the Telephone 
Company under this indenture; 

(e) to make such provision in regard to matters or questions arising 
under this indenture as may be necessary or desirable and not incon- 
sistent with this indenture. 

Section 2. “The Trustee is hereby authorized to join with the Tele- 
phone Company in the execution of any such supplemental indenture, 
to make the further agreements and stipulations which may be therein 
contained, and to accept the conveyance, transfer and assignment of 
any such property thereunder. 


ARTICLE THIRTEENTH 


Miscellaneous Provisions. 


Section 1. All the covenants, stipulations, promises and agreements 
in this indenture contained, by or in behalf of the Telephone Company, 
shall bind, and inure to the benefit of, its successors and assigns, whether 
so expressed or not. 


390 APPENDIX I 


Article Thirteenth, Sections 2 to 6. 


Section 2. Nothing in this indenture expressed or implied is intended 
or shall be construed to give to any person or corporation other than 
the Telephone Company, the Trustee and the holders of the bonds 
and interest obligations hereby secured, any legal or equitable right, 
remedy or claim under or in respect of this indenture or any covenant 
condition or provision herein contained. Ali its covenants, conditions 
and provisions are and shall be held to be for the sole and exclusive 
benefit of the Telephone Company, the Trustee and the holders of the 
bonds hereby secured. 


Section 3. For the purpose of facilitating the record hereof, this 
indenture may be executed in any number of counterparts, each of 
which shall be and shall be taken to be an original and all collectively 
but one instrument. 


Section 4. Any marginal notes hereon are no part of this indenture 
and shall not be deemed to affect the meaning or construction of any 
of its provisions. 

Section 5.2 The Telephone Company does hereby constitute and 
appoint Winfield S$. Penn to be its attorney, for it and in its name, 
and as and for its corporate act and deed, to acknowledge this indenture 
before any person having authority by the laws of the Commonwealth 
of Pennsylvania to take such acknowledgment, to the intent that the 
same may be duly recorded. 


Section 6. ‘The Trustee does hereby constitute and appoint Ularence 
W. Tower to be its attorney, for it and in its name, and as and for 
its corporate act and deed, to acknowledge this indenture, before any 
person having authority by the laws of the Commonwealth of Pennsyl- 
vania to take such acknowledgment, to the intent that the same may 
be duly recorded. 


IN WITNESS WHEREOF the parties hereto have caused their corporate 
seals to be hereunto affixed and their Presidents or Vice-Presidents, 
under and by the authority vested in them, have hereto affixed their 
signatures, and their Secretaries or Assistant Secretaries have duly 
attested the execution hereof, in the City of New York, the 10th day 
of October, 1925. 


THe TELEPHONE CoMpANY OF AMERICA, 
By (Sd.) L. H. Bell, 


[SEAL] President. 
Attest: 
(Sd.) Winfield 5S. Penn, 
Secretary. 


8’These sections 5 and 6 are inserted merely to comply with Pennsylvania 
requirements. 


FORM OF CORPORATE MORTGAGE 391 


Sealed and delivered by The Telephone Company of America in the 
presence of 


(Sd.) John H. Alexander, 
(Sd.) Robert V. Hamilton. 
NATIONAL TRusT CoMPANY, 
By (Sd.) H. F. Wall, 
[SEAL] Vice-President. 
Attest: 


(Sd.) Clarence W. Tower, 


Assistant Secretary. 


Sealed and delivered by National Trust Company in the presence of 


(Sd.) H: A. Arthur, 
(Sd.) P. H. Morton. 


CERTIFICATE OF RESIDENCE 


National ‘Trust Company, Mortgagee and Trustee within named, 
hereby certifies that its precise residence is No. 200 Wall Street, in the 
Borough of Manhattan, the City of New York, State of New York. 

NATIONAL TRusT ComMPANY, 


By (5d.)) H..F. Wall 
Vice-President. 


[ ACKNOWLEDGMENTS | 


APPENDIX II 


FORM OF EQUIPMENT TRUST 
(PHILADELPHIA PLAN) 


SOUTH COAST RAILWAY EQUIPMENT TRUST, SERIES D 
AGREEMENT 
Dated July 1, 1924 
Lo Cy Lorr 
and 
J. O. Carr 
: Vendors 
with 
NATIONAL TRustT CoMPANY 


‘Trustee 
and 


SouTH Coast RaiLway COMPANY 


AGREEMENT, dated this Ist day of July, 1924, by and between 

L. C. Lorr and J. O. Carr, hereinafter called the “Vendors,” re- 
siding respectively in the Borough of Brooklyn, City of New York, 
N. Y., and the City of New Rochelle, N. Y., of the first part; 


NATIONAL TRusT Company, hereinafter called the “Trustee,” a 
corporation created and existing under the laws of the State of New 
York, having its principal office at No. 200 Wall Street, Borough of 
Manhattan, City of New York, N. Y., of the second part, and 

SoutH Coast Raitway ComPANny, hereinafter called the “Railway 
Company,” a corporation of the State of Florida, of the third part. 

WuereEAas the Railway Company desires to obtain additional rolling 
stock in order that traffic over its lines may be properly transported, 
and it has been deemed expedient to make provision therefor through 
the medium of an equipment trust; and 

Wuereas the Vendors, for the purposes of said trust, have entered 
into or are about to enter into contracts for the manufacture and purchase 
of the following amount of such rolling stock (hereinafter called, col- 
lectively, the ‘“equipment”’) at the cost of approximately $2,387,400 
VIZ. ? 

20 mountain type locomotives, 

5 switching locomotives, 
3 passenger coaches, 

200 steel underframe ventilated box cars, 

20 caboose cars, 

100 wood underframe ballast cars; and 


395 


396 APPENDIX II 


WHEREAS the title to said equipment, contemporaneously with the 
delivery thereof by the several manufacturers to the Vendors, is to be 
vested in the Trustee and is to be retained by the Trustee until trans- 
ferred under the provisions of a lease thereof to be made by the Trustee 
to the Railway Company as hereinafter provided; and © 


WHEREAS the equipment trust share certificates to be issued as pro- 
vided in this agreement are to be sold, and the net proceeds of such sale 
are to be applied to the payment pro tanto of the cost of the said de- 
livered equipment, the remainder of such cost to be discharged out of 
advance rentals to be paid by the Railway Company under the terms 
of said lease of such equipment to be entered into by the Railway 
Company as hereinafter provided; 


Now, THEREFORE, THIS AGREEMENT WITNESSETH, that in. order 


to carry the foregoing purposes into effect, and in consideration of the 
mutual covenants herein contained, the parties hereto agree as follows: 


FIRST 


The Vendors, as speedily as may be, will cause to be built or acquired 
the equipment hereinabove specified, costing an aggregate of approxi- 
mately $2,387,400, and thereupon will sell and deliver said equipment or 
cause said equipment to be sold and delivered to the ‘I’rustee as trustee, 
as hereinafter set forth, for the holders of the share certificates issued 
under this agreement as hereinafter provided. 


Promptly upon the execution of this agreement, the Vendors will de- 
posit or cause to be deposited with the Trustee or to its credit as Trustee 
hereunder with such banks, bankers or trust companies doing business in 
the City of New York as may be designated by the Vendors and approved 
by the President or a Vice-President of the Trustee, in cash, the net 
proceeds of the sale of the share certificates issuable as hereinafter pro- 
vided, and at the same time the Railway Company will deposit with the 
‘Trustee (or, in case of the designation of another depositary as aforesaid, 
with such depositary, likewise to the credit of the Trustee) in discharge 
pro tanto of advance rental payable by the Railway Company to the Trus- 
tee under the aforesaid equipment lease, such additional amount in cash 
as will make the total sum deposited equal to $1,875,000. “Thereupon, 
without waiting for the recording, registration or filing of this agreement 
or of any lease of or other instrument respecting the equipment sub- 
jected to this agreement, the Trustee will issue and deliver to or upon 
the written order of the Vendors, share certificates, to be designated 
“South Coast Railway Equipment Trust Certificates, Series D,” and 
to be substantially in the form set forth in Article Second of this agree- 
ment, of the aggregate par value of $1,875,000. 


Thereafter, from time to time, when and as any of the equipment shall 
have been sold and delivered to the Trustee, and provided that a lease 


FORM OF EQUIPMENT TRUST 397 


of such delivered equipment shall have been made to the Railway Com- 
pany, all as in this agreement provided, the Trustee shall pay the Vendors 
or upon their order out of the said sum of $1,875,000 deposited with 
or to the credit. of the Trustee as aforesaid, an amount not exceeding 
eighty per cent (80%) of the cost of the equipment so delivered to the 
Trustee, as part payment of such cost; such cost to be conclusively estab- 
lished by the certificate in writing of the Vendors delivered to the Trus- 
tee prior to or contemporaneously with such payment. At or prior to 
the time of the delivery of such certificate of cost, there shall also be 
delivered to the Trustee (1) proper bills of sale to the Trustee of the 
delivered equipment, (2) a certificate in writing of counsel for the 
Vendors (who may be counsel for the Railway Company) to the effect 
that the Trustee’s title to such equipment under such bills of sale is 
perfect and unencumbered, and (3) a certificate in writing of the Ven- 
dors that the metal plates required by Article 5 of the form of lease here- 
inafter referred to, have been securely fastened on each side of the de- 
livered equipment. 


Delivery of the equipment shall be made to the Trustee by delivering 
the same to the Railway Company for account of the Trustee, f. o. b. 
tracks acceptable to the Railway Company against receipts to be signed 
in duplicate by a Vice-President of the Railway Company, indicating 
such delivery for the account of the Trustee. One of such duplicate 
receipts shall be delivered to the Trustee with the bills of sale and certifi- 
cates in this Article provided for. 


The Railway Company covenants that contemporaneously with such 
payment by the Trustee, the Railway Company will pay to the Trustee 
or deposit to the credit of the Trustee as aforesaid, as advance rental, as 
provided in said lease, amounts equal to the remainder of the cost of the 
delivered equipment, being not less than 20% of said cost. “Thereupon 
the Trustee will pay to the Vendors, by the use of such advance rental, 
the portion of the purchase price of the delivered equipment not dis- 
charged by the payment above described out of the moneys deposited with 
or to the credit of the Trustee, as aforesaid, upon the delivery of the 
share certificates. 


SECOND 


The share certificates (hereinafter termed “certificates’’) to be exe- 
cuted and delivered by the Trustee as in Article First of this agreement 
provided, shall not exceed the aggregate par value of $1,875,000. Each 
certificate shall be of the par value of $1,000, and shall be separately 
numbered. Certificates of the aggregate par value of one-fifteenth of 
the total authorized issue shall be due and payable on the Ist day of July, 
1925, and for the aggregate par value of one-fifteenth of the total au- 
thorized issue on the Ist day of July in each of the succeeding years to 
and including July 1, 1939, so that $125,000 aggregate par value of the 


398 APPENDIX II 


certificates shall become payable on July Ist of each year during said 
period. ‘The certificates shall be in substantially the following form, the 
par value, the number, and the date of payment, respectively, being speci- 
fied appropriately: 


SOUTH COAST RAILWAY EQUIPMENT TRUST 


SERIES D 
NG oe $1,000 


Five Per Cent. Equipment Trust Goip CERTIFICATE 


Dated July 1, 1924. Payable July 1, 19 
Authorized issue 1,875 shares of $1,000 each. 


Tuts 1s TO Certiry that the bearer hereof, or, if this certificate be 
registered as hereinafter provided, the registered holder hereof, is en- 
titled to a share of the par value of One thousand dollars in SoUTH 
Coast Rattway EquipMEeNtT Trust, Series D, in accordance with 
the provisions of a certain agreement bearing date the Ist day of July, 
1924, between L. C. Lott and J. O. Carr, the undersigned National 
Trust Company, and South Coast Railway Company (hereinafter called 
“the Railway Company”); and as hereinafter more fully provided, is 
entitled to the payment of said sum on the Ist day of July, 19 , in 
gold coin of the United States of America of the present standard of 
weight and fineness, upon surrender of this certificate to the undersigned 
‘Trustee, at its principal office, in the Borough of Manhattan, City 
and State of New York, and to payment in like gold coin, until and 
including said last mentioned date, of dividends on said sum at the 
rate of 5% per annum, semi-annually on the Ist day of January and the 
Ist day of July of each year, according to the tenor of the dividend war- 
rants hereto annexed, upon presentation and surrender of such warrants 
as severally they mature, to the undersigned at its said office; such pay- 
ment of the par value of this certificate and of the dividends thereon 
to be made only from and out of rentals when received by the under- 
signed pursuant to the provisions of said agreement dated July 1, 1924, 
and of the lease to the Railway Company of the railroad equipment 
described in said agreement, or from and out of any moneys otherwise 
received by the Trustee and applicable thereto under the provisions of 
said agreement for such payment; in and by which lease the Railway 
Company agrees to maintain said equipment and to pay to the under- 
signed, as rental therefor, an amount sufficient to discharge all taxes 
and other governmental charges (other than any income tax), the ex- 
penses of the trust, the amounts of the dividends, and the par value of 
said certificates, when payable, respectively, as in said agreement and 
lease provided. 


FORM OF EQUIPMENT TRUST 399 


This certificate is one of the share certificates of the aggregate pas 
value of $1,875,000 issued under said agreement dated July 1, 1924. 
For a full statement of the rights and obligations of the Railway Com- 
pany, the duties of the undersigned, the rights of the holders of the 
certificates and the provisions in said agreement dated July 1, 1924, 
in respect of the deposit with the Trustee or with banking depositaries 
to its credit of moneys applicable toward the payment of the cost of the 
said equipment pending its construction and delivery to the Trustee, 
reference is made to the said agreement dated July 1, 1924, on file in 
the office of the undersigned, and to the lease therein provided for. 


This certificate, unless registered in the name of the holder, shall pass 
by delivery; but at any time it may be registered in the name of the 
holder, upon presentation for the notation of such registration hereon, 
at the office of the undersigned in the Borough of Manhattan, City of 
New York. ‘Thereafter title hereto shall pass only by transfer, noted 
hereon, at the said office, unless and until a transfer to bearer shall have 
been so registered and noted hereon. Such registration in the name 
of the holder shall not affect the transferability of the dividend war- 
rants hereto annexed, title to which shall pass by delivery merely. 


Every taker and holder of this certificate and of the attached dividend 
warrants, by accepting the same, agrees with the undersigned and with 
every subsequent taker and holder hereof and thereof, that this certi- 
cate, unless registered in the name of the holder, and that such war- 
rants, may be negotiated by delivery by any person having possession of 
the same, respectively, howsoever such possession may have been acquired, 
and that any holder who shall have taken this certificate, unless so 
registered, or any such warrant from any person for value and without 
notice of prior defenses or equities enforcible against such person, shall 
thereby acquire absolute title hereto and thereto, as the case may be, 
free of any defenses enforcible against or equities or claims of ownership 
of any prior holder. Every taker and holder of this certificate and the 
attached dividend warrants hereby further agrees that the undersigned 
may treat the bearer of this certificate, unless registered in the name 
of the holder, and the attached warrants as the absolute owner hereof 
and thereof, as the case may be, for all purposes, and that the under- 
signed shall not be affected by any notice to the contrary. 

Neither this certificate nor the dividend warrants attached hereto 
shall be deemed in any wise the promise to pay of the undersigned. 

IN WITNESS WHEREOF, National Trust Company, as Trustee under 
the aforesaid agreement dated July 1, 1924, has caused this certificate 
to be executed in its behalf by its President, or one of its Vice-Presidents, 
and its corporate seal to be hereunto affixed and to be attested by its 
Secretary or an Assistant Secretary, and dividend warrants bearing the 


400 APPENDIX II 


engraved facsimile signature of its Treasurer to be attached hereto. 


Dated July 1, 1924. 
NATIONAL TRUST COMPANY, 

‘Trustee, 

Attest: 


President. 


eeeeoeeseeeeeee ee ee 


Secretary. 


The dividend warrants attached to said certificate shall read as 
follows, the blanks being appropriately filled in, viz.: 


Nos ingen $25. 
Due to the bearer hereof, on the Ist day of 


19 , on surrender hereof to the undersigned at its principal of- 
fice, in the Borough of Manhattan, City and State of New York, 
Twenty-five Dollars, being the semi-annual dividend on certificate 
INOS ees of SouTH CoAsT RAILWAY EQUIPMENT TRUST, Series D, 
payable only out of rentals, or other moneys applicable thereto, received 
by the undersigned under the agreement dated July 1, 1924, referred 
to in said certificate and as therein provided. 


NATIONAL TRUST COMPANY, 


‘Trustee, 


‘Treasurer. 


The facsimile signature of the Treasurer or other officer of the Trus- 
tee may be engraved or printed on the dividend warrants and may be 
used by the Trustee notwithstanding such person may have ceased to 
be such officer of the Trustee at the time of issuance of the certificates. 

Pending the preparation of definitive certificates, the Trustee may 
issue temporary certificates, of any denomination or denominations, with 
or without dividend warrants, substantially in the form hereinabove 
recited but with changes appropriate for such temporary certificates. 
Such temporary certificates shall be exchangeable, without cost to the 
holder, for definitive certificates when prepared. 

Any certificates with dividend warrants attached may be registered, 
as to the par value thereof, in the name of the owner, on the books of 
the Trustee in the Borough of Manhattan, City of New York, which 
registration shall be noted on the certificate, after which no transfer 
thereof shall be valid unless made on said books, until the certificate so 
registered shall have been transferred to bearer. Upon such transfer 
to bearer the certificate shall again become transferable by delivery, but 
it may again and from time to time be registered as before. ‘The divi- 
dend warrants shall always be transferable by delivery. 


FORM OF EQUIPMENT TRUST 401 


The Trustee agrees to keep at its office in the Borough of Manhat- 
tan, City of New York, a register in which the holders of any such 
certificates may have the same registered as therein provided. 

Anything to the contrary notwithstanding, the parties hereto may 
deem and treat the bearer of any unregistered certificate issued here- 
under, and the bearer of any dividend warrant, as the absolute owner 
of such certificate or dividend warrant, as the case may be, for the pur- 
pose of receiving payment thereof, and for all other purposes, and shall 
be affected in no wise by any notice to the contrary. ‘The parties hereto 
may deem and treat the person in whose name any certificate issued here- 
under shall be registered, as hereinbefore provided, as the absolute owner 
of such certificate, for the purpose of receiving payment of or on account 
of the par value of the share or shares represented by such certificate, 
and for all other purposes, and all such payments so made to any such 
registered holder, or upon his order, shall be valid and effectual to sat- 
isfy and discharge the amount payable upon such certificate to the extent 
of the sum or sums so paid. 

The Railway Company covenants that it will make payment of the 
rentals on account of the equipment as provided in this agreement and 
in the lease herein referred to, notwithstanding any of the certificates 
and dividend warrants shall have been acquired by the Railway Com- 
pany or shall not have been presented for payment. ‘The Trustee hav- 
ing received the rentals applicable to the payment of the certificates 
and dividend warrants, shall make payments in discharge of the same 
as therein provided, and thereupon shall cancel the certificates and 
dividend warrants so paid, and no certificates or dividend warrants in 
substitution therefor shall be issued. Neither the Trustee nor the Rail- 
way Company shall extend or consent to the extension of the time of 
payment of the par value of any certificate or of any dividend warrant, 
and if such extension be made, such certificate or such dividend war- 
rant so extended shall be subject to the prior payment in full of the 
par value of the other certificates and dividend warrants whose pay- 
ment shall not have been extended, whether such certificates and divi- 
dend warrants be then matured or unmatured. 

In case any certificate or dividend warrant issued hereunder shall 
become multilated, or shall be lost, stolen or destroyed, the “Trustee may 
issue a new certificate or dividend warrant in lieu of the certificate or 
dividend warrant thus mutiliated, stolen, lost or destroyed; but the Trus- 
tee shall not be obligated to issue such new certificate or dividend war- 
rant unless it shall have received evidence satisfactory to it of the mutila- 
tion, loss, theft or destruction, nor, unless, if mutilated, the mutilated 
certificate or dividend warrant shall be delivered to it for cancellation, 
nor unless the Trustee shall be secured against loss or damage, in such 


402 APPENDIX II 


manner and form as it may deem proper; and the Trustee may charge 
for the issuance of such new certificate or dividend warrant, an amount 
sufficient to reimburse it for the expense thereby caused. 


THIRD 


The Railway Company covenants that it will lease from the Trus- 
tee, for a term ending July 1, 1939, all the equipment conveyed or 
caused to be conveyed to the Trustee by the Vendors. ‘The lease in- 
strument shall be substantially in the form hereto annexed. 

‘The rentals in the lease provided to be paid to the ‘Trustee by the 
Railway Company, in addition to the advance rentals specified in Article 
First of this agreement, shall be equal to the following amounts, at 
the times stated, respectively: 


(1) Amounts sufficient to reimburse the expenses and pay the proper 
compensation of the Trustee in the administration of: its trust under 
this agreement and under the lease; such amounts to be paid from time 
to time upon request of the Trustee; 


(2) Amounts sufficient to pay and discharge any and all taxes, as- 
sessments, or other governmental charges (other than any income tax) 
upon the income or property of the trust under this agreement which 
the Trustee may be required to pay, or which by law may be deductible 
from the par value of the share certificates issued under this agreement, 
or from the dividends on such share certificates; payment of such 
amounts to be made to the Trustee from time to time and at such times 
as shall enable the Trustee to pay or discharge any such taxes, assess- 
ments, or other governmental charges when and as the same shall 
severally become payable; 


(3) On the Ist day: of January, and the Ist day of July, 1925, and 
on the same days in each year thereafter, until and including the Ist 
day of July, 1939, an amount which shall be equal to the semi-annual 
dividend of two and one-half per cent (payable on each of said dates, 
respectively) of the par value of the share certificates at the time out- 
standing; and 


(4) On the Ist day of July, 1925, and on the same day in each year 
thereafter until and including the Ist day of July, 1939, the sum of 
$125,000, being the aggregate par value of the said share certificates 
payable according to their terms on each of said respective dates. 

It being contemplated that all of said $1,875,000 of certificates shall 
be issued forthwith upon the deposit with the Trustee or to its credit 
as Trustee hereunder, of $1,875,000 in cash, as in Article First of this 
agreement provided, the Railway Company covenants that it will pay 
to the Trustee the said rentals when and as the same shall become due 
and payable, as in this agreement and in the said lease provided, not- 
withstanding any of such payments shall have become so due and pay- 


FORM OF EQUIPMENT TRUST 403 


able prior to the delivery under the lease to the Railway Company of 
any of the said equipment. 


‘The aggregate amount of the said advance rentals to be paid by the 
Railway Company under said lease, shall be equal to the amount by 
which the cost of all said equipment delivered to the Trustee under this 
agreement shall exceed the net proceeds of the sale of the certificates 
issued under this agreement, notwithstanding such cost of such equip- 
ment shall exceed the approximate cost of $2,387,400 set forth in the 
recitals of this agreement. 


‘The Railway Company covenants that it will not transfer, assign or 
encumber its interest in or under this agreement, or in or under any 
lease made as provided herein, or in or to any of such equipment, ex- 
cept subject hereto. 


FOURTH 


The Trustee covenants that all its interest and rights under this 
agreement and under the lease to be made by it to the Railway Com- 
pany, as herein provided, and all its title to the equipment thereby 
leased to the Railway Company, and all the rentals of the said equip- 
ment received or collected by the Trustee from the Railway Company, ~ 
as well as all proceeds of any subsequent lease or sale of the equipment 
which may be received by the Trustee, as hereinafter provided, and all 
other moneys or securities held by the Trustee hereunder, until applied 
or disposed of in accordance with the provisions of this agreement or 
such lease, including moneys deposited to its credit under the provi- 
sions of this agreement, are to be held and shall be held by the Trustee, 
IN TRUST, for the use and benefit of the holders of the certificates 
issued hereunder, ratably, according to the par value of their respective 
shares represented by said certificates, and to be disposed of by the 
Trustee in accordance with the provisions of this agreement. 

The Trustee further covenants to enforce, as far as practicable (in 
the manner herein provided), for the use and benefit of the holders of 
the certificates, the performance of all and singular the terms, conditions 
and covenants of the lease, and to apply and distribute the rentals there- 
under when and as the same shall be received, to and for the following 
purposes, and in the following order, to wit: 

(1) To the payment of the expenses and proper compensation of 
the Trustee for its services under this agreement and the said lease; 

(2) To the payment of any and all taxes or other governmental 
charges which the Trustee may be required by law to pay or deduct; 

(3) To the payment of the dividend warrants attached to the 
certificates, when and as the same respectively shall become payable, 
subject to the provisions of Article Second hereof; 


404 APPENDIX II 


(4) ‘To the payment of the par value of the certificates, when and 
as the same respectively shall become payable, subject to the provisions 
of Article Second hereof. 


FIFTH 


In case the Railway Company shall at any time make default in tne 
payment of any part of the rental in the lease reserved, or shall fail 
to keep and perform any of the terms and covenants of the lease and 
any of its obligations under this agreement, the Trustee shall be entitled 
to enforce all the terms and stipulations of the lease, for the benefit of 
the holders of the certificates. In case the Trustee shall retake posses- 
sion of the equipment, it either may hold, or may lease, or publicly or 
privately and for cash or upon credit may sell or dispose of said equip- 
ment, or any part thereof, as the Trustee in its discretion may deem most 
beneficial to the holders of the certificates, and as may be authorized 
by law. The proceeds of any such lease or sale or disposition, together 
with any insurance money or other moneys in the hands of the Trustee, 
including moneys deposited to its credit as aforesaid, after deducting the 
expenses and compensation of the Trustee, and any sums paid for insur- 
ance premiums, and all taxes which the Trustee may be required by law 
to pay in respect of the trust property or the certificates, or the divi- 
dends thereon, shall be applied by the Trustee to the payment, first of 
the dividend warrants then due, and next, of the par value of all the 
outstanding certificates, whether the same shall have matured by their 
terms or not, in full, if such proceeds shall be sufficient, and if not 
sufficient, then pro rata, subject to the provisions of Article Second 
hereof. 


SIXTH 


‘The Trustee shall not be liable to any of the parties hereto, or to any 
of the holders of the certificates or warrants, for the delivery of any 
of the equipment, or for any defect therein, or in the title thereto of 
the Trustee, nor shall anything herein be construed as a warranty on 
the part of the Trustee in respect thereof or as a representation of the 
value thereof. 

The Trustee may exercise its powers and perform its duties by or 
through such attorneys, agents, or servants as it shall appoint, and shall 
be answerable only for its own acts, negligence and defaults and not 
for the default or misconduct of any attorney, agent or servant selected 
by it with reasonable care; nor shall it be liable in any event for any 
acts except for its own negligence or defaults. 

The Trustee shall not be under any obligation to take any action 
toward the execution or the enforcement of the trusts created by this 
agreement which in its opinion will be likely to involve it in expense 
or liability, unless one or more holders of the certificates issued here- 
under shall furnish to the Trustee, as often as it may require, indemnity 


FORM OF EQUIPMENT TRUST 408 


satisfactory to the Trustee against such expense or liability; nor shall 
the Trustee be required to take notice of any default under this agree- 
ment, or in any lease provided for herein, or be deemed to have notice 
of any such default, unless notified in writing of such default by the 
holders of at least twenty-five per cent of the par value of the certifi- 
cates then outstanding; but the foregoing provisions of this Article Sixth 
are intended only for the protection of the Trustee and shall not be 
construed to limit or to affect any discretion or power given to the 
Trustee by any provision of this agreement or of any lease, to determine 
whether or not it shall take action in respect of any default, or any 
power or discretion of the Trustee to take action in respect of any 
default without such notice or request from certificate holders. 

The Trustee in its discretion may advise with legal counsel, to be 
selected and employed by it at the expense of the Railway Company, 
and anything done or suffered in good faith by the Trustee, in accord- 
ance with the opinion of counsel, shall be conclusive in favor of the 
‘Trustee as against the parties to this agreement and all holders of certi- 
ficates issued hereunder. 

The Trustee shall be under no duty or obligation to see to the record- 
ing, registration or filing of this agreement or of any lease of the equip- 
ment, or of any agreement or other instrument hereafter executed in 
respect of the equipment or parts thereof, or of any substituted or ad- 
ditional equipment subjected to this agreement or any such lease; but 
the Railway Company hereby agrees to file, record and register this 
agreement, in connection with the writing whereby the equipment is 
leased by the Trustee to the Railway Company, in each and every 
jurisdiction in which the lines of railroad of the Railway Company en- 
ter, and in any other jurisdictions as may be required by law in order 
to publish notice of and to protect the Trustee’s title to the leased equip- 
ment and any replacements. 

The Trustee shall not be responsible in any way Roe the recitals herein, 
or in any lease of the equipment contained, such recitals being made 
solely by the Railway Company, or for the validity hereof, or for any 
mistake of fact or law. 

The Trustee shall be under no duty or obligation to see to the 
maintenance, repairing, or insuring of any of the equipment. 

No holder of any certificate or warrant issued hereunder shall have 
any right to institute any suit, action or proceeding for the execution 
or enforcement of the trusts hereby created, unless request in writing 
by the holders of not less than twenty-five per cent in amount of the 
then outstanding certificates shall have been made upon the Trustee as 
aforesaid, and indemnity satisfactory to it furnished, and unless after 
a reasonable time shall have elapsed for action by the Trustee upon 
such request, it declines to institute any proceedings pursuant thereto. 

The Trustee shall not incur any liability to anybody in acting upon 


406 APPENDIX II 


any notice, request, consent, order, certificate, warrant, or other paper 
or instrument believed by it to be genuine or authentic and to be signed 
by the proper party or parties. 

The Railway Company agrees to pay the expenses and any stamp 
taxes or other taxes incident to the preparation, execution and issue of 
the trust certificates and dividend warrants to be issued hereunder, or 
incident to the preparation, execution, recording, registration and filing 
of this agreement and of the lease herein referred to, and of any instru- 
ments hereafter executed under the provisions hereof in respect of any 
of the equipment or any lease thereof, or any equipment or parts used 
to replace any of the equipment, or any sale or purchase of any equip- 
ment or parts. 

The Trustee shall be reimbursed by the Railway Company for, and 
be indemnified by it against, any expense and any liability and damages 
which may be sustained by the Trustee hereunder. 

In case of default under any lease, as therein provided, the expenses 
and compensation of the Trustee shall first be paid out of the proceeds 
of any sale of the equipment. 

Any moneys received by the Trustee hereunder, or under any of the 
leases, shall be treated by it, until it is required to pay out the same in 
conformity herewith, as a special deposit, to be held by the Trustee for 
the purposes set forth in this agreement and in the lease to be made 
by the Trustee to the Railway Company, and the Railway Company 
shall be entitled, but only as below more fully provided, to such interest 
thereon as during that time the Trustee allows to similar depositors, 
provided, however, that on request of the Railway Company, such 
moneys shall be invested by the Trustee (until it is required to pay out 
the same in conformity herewith), in certificates of indebtedness, or 
other obligations of the United States, or in bonds, or notes of the 
City of New York issued in anticipation of the collection of taxes, or in 
bank acceptances. ‘The Railway Company shall be entitled to receive 
any profit which may arise from the sale of such certificates of indebt- 
edness or other obligations, bonds, notes, or bank acceptances, and shall 
reimburse the Trustee for any loss sustained in connection therewith; 
and the Trustee shall not be liable to any one for any loss so sustained. 
The certificates of the banks, bankers, or trust companies designated as 
depositaries under the provisions of this agreement, stating that they 
hold a stated amount subject to the order of the Trustee, shall be full 
protection to the Trustee for its action on the faith thereof; and the 
Trustee shall not be liable for any act or omission of any such depos- 
itary. Said banks, bankers, or trust companies shall be fully protected 
in paying said moneys so deposited with them, and any such interest, 
to or upon the order of the Trustee, and shall be under no obligation 
to see to the application thereof in accordance with the provisions of 
this agreement. 


FORM OF EQUIPMENT TRUST 407 


Interest allowed by the Trustee upon moneys received by it, income 
from investments made by the Trustee on request of the Railway Com- 
pany in securities of the classes above specified, and interest allowed by 
any such bank, bankers, or trust companies upon moneys deposited with 
them to the credit of the Trustee, shall, so long as there shall be no 
default on the part of the Railway Company hereunder, or under said 
lease, be paid to the Railway Company by or upon the order of the 
‘Trustee; provided, however, that until all of the equipment herein- 
before specified shall have been delivered to the Trustee and leased to 
the Railway Company, all such interest shall be applied by the Trustee 
toward the payment of the dividend warrants as from time to time they 


fall due. 


‘The Trustee may become the owner of certificates and warrants is- 
sued hereunder with the same rights which it would have if it were 
not Trustee. 

If at any time the Trustee, or any successor to it in the trust hereby 
created, shall desire to divest itself of its title to the equipment and 
to terminate its duties and obligations and rights under this agreement 
and the certificates, it shall so notify the Railway Company in writing 
and the Railway Company shall thereupon designate in writing to the 
‘Trustee a national bank or a trust company qualified as below specified, 
to which may be assigned the entire right, title and interest of the I'rus- 
tee in the equipment and in which may be vested the rights, powers, 
duties and obligations of the trust under this agreement and the certifi- 
cates. Upon the transfer and delivery of all moneys and equipment 
held by the ‘Irustee and the execution by the Trustee of such instru- 
ments of transfer as may be requested by the successor trustee, and upon 
acceptance by the successor trustee of the assignment of the trust, the 
Trustee shall be relieved of all the title, rights, powers, duties, obliga- 
tions and immunities of the trust under this agreement and the certifi- 
cates, and the same shall become vested in such successor trustee and 
every provision of this agreement applicable to the Trustee shall apply 
to such successor trustee with like effect as if originally named herein 
in the place and stead of the party of the second part. In the event 
that the Railway Company fails to designate such a successor trustee 
by instrument in writing delivered to the Trustee, within two weeks 
from the time of receiving such notice in writing from the Trustee, the 
Trustee may thereupon designate such successor trustee. “The Railway 
Company will execute such writings recognizing the transfer of title 
as aforesaid, and all such instruments of further assurance or otherwise 
as may be requested by the successor trustee in the premises, and will 
do and perform any and all acts necessary to establish and maintain 
the title and rights of the successor trustee in and to the equipment. 


408 APPENDIX II 


Every successor trustee shall be a national bank or a trust company 
doing business in the Borough of Manhattan, City of New York, and 
having a capital and surplus of at least $5,000,000, if there be such 
national bank or trust company willing and able to accept the trusts 
upon reasonable and customary terms and duly qualified to act as such 
trustee. 


SEVENTH 


In the case of the death or inability to act of either of the Vendors, 
the other Vendor shall have and discharge all the powers of the Vendors. 
Any action taken by either of the Vendors shall have the same force 
and effect as if taken by both of them. 

This agreement is simultaneously executed in several counterparts, 
each of which shall be deemed to be an original, and all collectively to 
be one and the same instrument. 

This agreement shall be binding upon and inure to the benefit of the 
parties hereto and their successors and assigns. 

IN WITNESS WHEREOF, the parties of the first part have hereunto 
set their hands and seals, and the parties of the second and third parts 
have caused these presents to be signed in their behalf, respectively, 
and their corporate seals to be hereto affixed, as of the day and year first 
above written. 

Li Ce Lorr: anaes 
J. Ov Carn “ae 
Signed, sealed and delivered as to 
beC. Lott and jy OP Carr 
in the presence of: 
CU. COCLINTON 
E. K. THomas 


NATIONAL TRUST COMPANY 
By H. F. Watt, 
Vice-President. 
Attest: 


C. W. Towrr [ CORPORATE 
Asst. Secretary. SEAL | 


Signed, sealed and delivered as to 
National ‘Trust Company in the 
presence of: 

C. C. CLINTON 
E. K. THOMAS 


FORM OF EQUIPMENT TRUST 409 
SOUTH COAST RAILWAY COMPANY 


By Wm. R. Ruopss, 


President. 
Attest: 
GD. Post [CORPORATE 
Secretary. SEAL | 
Signed, sealed and delivered as to 
South Coast Railway Company 
in the presence of: 
C. C. CLINTON 
E. K. THOMAS 
[ ACKNOWLEDGMENTS | 
Lease AGREEMENT 
Dated July 1, 1924 
NATIONAL TRust COMPANY 
‘Trustee 


to 


SoutTH .Coast RattwAy COMPANY 


LEASE AGREEMENT made this first day of July, 1924, between 

NATIONAL TRust Company, hereinafter called the ‘Trustee,’ a 
corporation created and existing under the laws of the State of New 
York, having its principal office at No. 200 Wall Street, in the Bor- 
ough of Manhattan, City and State of New York, as Trustee under 
the Agreement dated July 1, 1924, hereinbelow more fully described, 
of the first part, and 

SouTH Coast Raitway ComPANny, hereinafter called the “Railway 
Company,” a corporation of the State of Florida, of the second part 

WHEREAS, under date of July 1, 1924, an Agreement creating an 
equipment trust, designated “South Coast Railway Equipment ‘Trust, 
Series D,” was entered into by and between L. C. Lott and J. O. Cair 
(therein and hereinafter termed the ‘“Vendors’’), the said National 
Trust Company, and the said South Coast Railway Company, and this 
lease is entered into as contemplated and provided for in said Agree- 
ment; and 

WHEREAS, under the said Agreement dated July 1, 1924, as pro- 
vided therein, there have been issued by the Trustee its certificates of 
shares in the said equipment trust, which certificates (hereinafter called 
the “share certificates’) are of the aggregate par value of $1,875,000, 


410 APPENDIX II 


and bear date July 1, 1924, and mature serially in annual instalments 
of $125,000 par value (the first instalment being payable July 1, 1925, 
and the final instalment on July 1, 1939), and provide, among other 
things, for the payment of dividends on said certificates, from July 1, 
1924, until the respective due dates of the certificates, at the rate of 
five per cent per annum, semi-annually on the first day of January 
and the first day of July of each year; and as further provided in said 
Agreement and also in the share certificates, the payment of the par 
value of the share certificates and the dividends thereon and of taxes 
(other than any income tax) and the Trustee’s expenses and charges is 
to be made only out of moneys received by the Trustee from the Railway 
Company as lessee of the equipment described in said Agreement or 
from or out of any moneys otherwise received by the Trustee and ap- 
plicable to such payment; and 


WHEREAS in and by said Agreement dated July 1, 1924, it is pro- 
vided that promptly upon the execution thereof there will be deposited 
with the Trustee or to its credit as Trustee under South Coast Rail- 
way Equipment rust, Series D, with such banks, bankers or trust 
companies as may be designated by the vendors and approved by the 
President or a Vice-President of the Trustee, the sum of $1,875,000, 
and that thereafter from time to time, when and as any of the railroad 
equipment described therein shall have been sold and delivered to the 
Trustee, and provided that a lease of such delivered equipment shall 
have been made with the Railway Company in the form of this lease, 
the Trustee shall pay, out of said sum of $1,875,000, an amount not 
exceeding eighty per cent of the cost of the equipment so delivered to 
the Trustee, as part payment of such cost, and that contemporaneously 
with such payment by the Trustee the Railway Company will pay to 
the Trustee or deposit to its credit as said Trustee, as advance rental 
under this lease an amount equal to the remainder of the cost of the 
delivered equipment (being not less than twenty per cent. of the said 
cost), to be applied by the Trustee in payment of the portion of the 
purchase price of the delivered equipment not discharged by the pay- 
ment out of the moneys deposited with or to the credit of the Trustee 
as aforesaid. 


Now, THEREFORE, in consideration of One Dollar to the Trustee in 
hand paid by the Railway Company, the receipt whereof is hereby ac- 
knowledged, and in further consideration of the covenants and promises 
herein contained and in pursuance of said Agreement dated July 1, 
1924, the parties hereto agree as follows: 

1. The Trustee agrees that upon acquiring title, pursuant to the 
said Agreement dated July 1, 1924, to any and all of the railroad roll- 
ing stock described in the inventory hereto attached, the Trustee, as 
owner thereof, will deliver such rolling stock to the Railway Company 


FORM OF EQUIPMENT TRUST 411 


as lessee under this lease, and the Railway Company agrees to receive 
such rolling stock as such lessee. 


2. The Trustee hereby agrees to lease, and by these presents does 
lease, to the Railway Company, from the date of the delivery thereof 
by the Trustee to the Railway Company, all of the said rolling stock 
(hereinafter termed the “leased equipment”), at the rental and upon 
the terms and conditions hereinafter set forth. Delivery of the equip- 
ment shall be deemed to be made to the Railway Company from time 
to time as delivery thereof is made to the Trustee under the said 


Agreement dated July 1, 1924. 


Upon condition that the Railway Company shall make all the pay- 
ments of rental herein agreed by it to be made to the Trustee as set forth 
in Article 3 hereof, the Trustee further agrees with the Railway 
Company (1) that when fully completed, but not before, such pay- 
ment shall be applied and shall be treated as purchase money and as 
the full purchase price of the leased equipment; (2) ‘that when the 
said payments shall have been made in full and the terms of this lease 
shall have been performed on its part by the Railway Company, then 
and not before, the title to all of the leased equipment and to all 
replacements thereof made hereunder shall vest in the Railway Com- 
pany; and (3) that thereupon the Trustee will execute for record in 
public offices, such instrument or instruments in writing as reasonably 
shall be requested by the Railway Company in order then to make clear 
upon the public records the title of the Railway Company to all of the 
leased equipment and replacements thereof, under the laws of any 
jurisdiction. 

The Trustee is not to be held liable on any warranty of title or 
quality, express or implied, and acceptance by the Railway Company 
of delivery of any of the leased equipment or any replacements thereof, 
under the terms of this lease, shall operate ipso facto as a conclusive 
acknowledgment on the part of the Railway Company that it is satisfied 
with the quality of said equipment thus delivered to it and with the 
Trustee’s title thereto. 

3. The Railway Company hereby agrees to accept, and hereby does 
accept, the lease of the leased equipment made to it by the Trustee as 
set forth in Article 2 of this lease, and covenants with the Trustee 
that it will pay to the Trustee, as rental for the use of the leased 
equipment and any and all replacements thereof, during the term and 
pursuant to the provisions hereof, sums sufficient to discharge and pay 
the following when and as the same shall become payable, viz.: 

A. From time to time, as provided in said Agreement dated July 1, 
1924, the Railway Company shall pay to the Trustee or deposit to its 
credit as Trustee under said Agreement dated July 1, 1924, with such 
banks, bankers or trust companies as may be designated by the Vendors 


412 APPENDIX II 


and approved by the President or a Vice-President of the Trustee, as 
advance rental under this lease, sums which in the aggregate shall be 
equal to the difference between the total cost of the leased equipment 
and the portion of such cost to be provided out of the net proceeds 
of sale of the share certificates to be issued as set forth in said Agree- 
ment; the intention being that when all of the leased equipment shall 
have been delivered to the Trustee, the Railway Company shall have 
paid or shall pay to the Trustee (or, shall have deposited or shall deposit 
to the credit of the Trustee as aforesaid) as advance rental under this 
lease, a sum equal to the amount by which the entire cost of the leased 
equipment exceeds the said net proceeds of the sale of the aforesaid share 
certificates. The Railway Company agrees to pay such advance rental 
as follows: 

(1) Promptly upon the execution of this lease, a sum which when 
added to the net proceeds of the sale of the share certificates paid or 
credited to the Trustee by the Vendors, will make the total sum depos- 
ited with or to the credit of the Trustee equal to $1,875,000; 


(2) Upon delivery of any of the equipment to the Trustee and part 
payment therefor by the Trustee out of deposited moneys, amounts 
equal to the remainder of the cost of such equipment, being not less 
than 20% of such cost. 

B. In addition to said advance rental, the Railway Company shall 
pay to the Trustee, from time to time as below provided, as rental 
for the leased equipment and replacements, and whether or not at the 
time any thereof shall have been delivered to the Railway Company, 
the following: 


(1) Amounts sufficient to reimburse the expenses and pay the proper 
compensation of the Trustee in the administration of its trust under 
the said Agreement dated July 1, 1924, and under this lease, and any 
other sums payable by the Railway Company under said indentures; 
such amounts to be paid from time to time upon request of the Trustee; 


(2) Amounts sufficient to pay and discharge any and all taxes, assess- 
ments or other governmental charges (other than any income tax) upon 
the income or property of the trust under the said Agreement dated 
July 1, 1924, which the Trustee may be required to pay, or which by 
law may be deductible from the par value of the share certificates issued 
under said Agreement dated July 1, 1924, or from the dividends on 
said share certificates; the payment of such amounts to be made to the 
‘Trustee from time to time and at such times as shall enable the Trustee 
to pay or discharge any such taxes, assessments or other governmental 
charges when and as the same severally shall become payable; 

(3) On the first day of January and the first day of July, 1925, 
and on the same days in each year thereafter until and including the 
first day of July, 1939, an amount which shall be equal to the semi- 


FORM OF EQUIPMENT TRUST 413 


annual dividend of two and one-half per cent (payable on each of said 
dates, respectively) of the par value of the said share certificates at the 
time outstanding; and 


(4) On the first day of July, 1925, and on the same day in each year 
thereafter until and including the first day of July, 1939, the sum of 
$125,000, being the aggregate par value of the said share certificates 
payable according to their terms on each of said respective dates. 


4, Until it shall have fulfilled all its obligations under this lease, 
the Railway Company, at its own cost and with due diligence and as 
promptly as may be practicable under the circumstances, shall and will 
replace any and all of the leased equipment (and, as well, any equip- 
ment substituted therefor as in this Article provided) that may have 
been lost to it or may have been wholly or partly destroyed by accident 
or otherwise, with other railroad rolling stock of equal value, title to 
which shall be properly vested in the Trustee as though it had been 
part of the leased equipment originally delivered by the Trustee to the 
Railway Company. The rights and remedies of the Trustee to enforce 
and to recover any of the rental payments from the Railway Company 
shall not be affected by reason of the leased equipment or any thereof 
becoming wholly or partly destroyed, lost or unfit for use. 


The Railway Company agrees to comply in all respects with all acts 
of Congress and with the laws of the United States, and of the states, 
territories and counties in which its lines may extend during the term 
of this agreement and with the lawful rules of the Interstate Commerce 
Commission and any other legislative, executive, administrative or judi- 
cial body exercising any power or jurisdiction over any of the equipment, 
and in the event that the said laws or rules require the alteration of 
any of the said equipment, the Railway Company agrees to conform 
therewith at its expense and maintain the same in proper condition and 
design for operation under such laws and rules during the life of this 
agreement; provided, however, that the Railway Company may in good 
faith contest the application of any such law or rule in any reasonable 
manner which will not affect the title of the Trustee in and to the 
equipment. | 

5. Until all the obligations of the Railway Company under this 
lease shall have been fully performed, the title to all of the leased 
equipment, together with any and all replacements thereof made here- 
under, shall be and remain in the Trustee; and except as lessee under 
this lease, the Railway Company shall not have any title to any of the 
leased equipment or any replacements thereof and (except as expressly 
provided in Article 15 of this lease) shall not make any agreements with 
relation to the whole or any part of such equipment or replacements 
which in any way shall diminish or alter any obligation of the Railway 
Company concerning the same. 


414 APPENDIX II 


The Railway Company covenants that it will keep every piece of 
the leased equipment and replacements thereof at all times plainly 
marked on each side thereof with the words and letters following, to 
wit: “South Coast Railway Equipment Trust, Series D; National Trust 
Company, Trustee, Owner, Lessor.”’ Each locomotive and car included 
in the leased equipment shall at the time of the delivery thereof to 
the Railway Company be so plainly marked by a metal plate, securely 
fastened on each side thereof, or by other durable marking, and each 
item of equipment acquired by the Railway Company as in this lease 
provided in replacement of any of the leased equipment shall be simi- 
larly so marked at the time of its acquisition. In case any of such 
plates or marks shall at any time be removed, defaced or destroyed, 
the Railway Company covenants that it will immediately restore the 
same. “The Railway Company covenants that it will not allow anything 
to be placed on any of such equipment which might be interpreted as 
a claim of ownership by the Railway Company or by any one other 
than the Trustee; provided, however, that the Railway Company may 
cause the said equipment to be lettered, ‘South Coast,” ‘Coast System”’ 
or in some other appropriate manner for convenience of identification 
of the leasehold interest of the Railway Company therein. ‘The Rail- 
way Company covenants that it will not change or permit to be changed 
the number of any of the locomotives or cars included in the leased 
equipment or replacements thereof, without the written consent thereto 
by the Trustee; and in any such case, if the same be feasible or neces- 
sary, will at its own expense cause to be made such notation on or 
addition to the record of this lease as may be proper to preserve or 
protect the record title of the Trustee to such equipment. 

6. The Railway Company at its own cost shall maintain in good 
order and repair (the damages to be made good including damage by 
fire) all of the leased equipment and all replacements thereof made 
hereunder. Until the Railway Company shall have fulfilled all its 
obligations under this lease, it shall furnish to the Trustee through its 
President or a Vice-President, once in each year, an accurate statement 
in writing of (a) the equipment then in actual service, (b) the amount 
and description of all such that may have been lost or destroyed by 
accident or otherwise during the year next preceding and of the replace- 
ments thereof, and (c) the amount and description of all repaired 
during the year next preceding and of all then undergoing repair or 
withdrawn from use for repairs. Once in every such year the Trustee 
shall have the right, but shall be under no duty, to inspect the equipment 
by an agent or agents properly accredited, whose reasonable compen- 
sation shall be paid by the Railway Company. ‘The Trustee may de- 
mand and the Railway Company agrees thereupon to furnish from time 
to time such additional evidence as shall be satisfactory to the Trustee 


FORM OF EQUIPMENT TRUST 415 


that the covenants of the Railway Company contained in this Article 6 
have been duly performed. 


7. The Railway Company shall indemnify the Trustee against all 
claims arising out of or connected with the ownership or use of any 
of the leased equipment or replacements thereof, and particularly against 
any or all claims arising out of the use of any patented inventions in 
or about the leased equipment or replacements; and the Railway Com- 
pany shall not be relieved from any of its obligations under this lease 
by reason of the assertion or enforcement of any such claims or the 
commencement or prosecution of any litigation in respect thereof. 


8. The Railway Company covenants that it will cause this lease 
to be filed, registered and recorded in each and every jurisdiction in 
which the lines of railroad ,of the Railway Company enter and in any 
other jurisdictions as may be required by law, in order to publish notice 
of and to protect the Trustee’s title to the leased equipment and any 
replacements, and ,from time to time will perform any other act re- 
quired by law, and will execute any and all further instruments that 
reasonably shall be requested by the Trustee for such publication and 
protection of such title. Until it shall have discharged all its obligations 
under this lease, the Railway Company shall pay all costs, charges and 
expenses, including all recording and registration taxes and fees, and 
all expenses incident to the preparation, execution, acknowledgment, 
filing, registering and recording of this lease and the said Agreement 
dated July 1, 1924, and of any instrument of further assurance, and 
all stamp taxes, duties, imposts, assessments, charges, fines and penalties 
of any kind imposed upon this lease, or the leased equipment, or the 
parties operating the same, or the Trustee, either because of its ownership 
of the leased equipment or the manner of operation thereof, and shall 
keep the leased equipment and all replacements thereof at all times free 
from any liens which would be an encumbrance upon the ‘Trustee’s 
title thereto. 


9. In case the Railway Company (a) shall make default in any pay- 
ment hereinabove agreed to be made by it to the Trustee and such 
default shall have continued for the period of ninety days or (b) shall 
fail to observe or perform any of the agreements herein on its part 
required to be performed and such default shall have continued for the 
period of ninety days—then and in any such case the Railway Company 
shall be deemed to have committed an “act of default.” 


10. If the Railway Company shall have committed any act of de- 
fault, then and thereafter at any time during the continuance of such 
default, the Trustee at its option may declare to be due and payable 
forthwith the entire amount of the rentals (including any unpaid ad- 
vance rentals) payable by the Railway Company as set forth in Article 
3 of this lease, and not theretofore paid; and thereupon the entire 


416 APPENDIX II 


amount of such rentals shall become and shall be due and payable imme- 
diately, without further demand, together with interest at the rate of 
five per cent per annum on any portion thereof then overdue; and for 
the total amount so becoming forthwith payable by the Railway Com- 
pany the Trustee shall be entitled to recover judgment, with interest 
at the rate of five per cent per annum, and to collect such judgment 
out of any property of the Railway Company wherever situated. Any 
and all moneys collected by the Trustee as provided in this Article 10 
shall be applied by it as hereinafter in Article 14 of this lease provided. 
In its discretion the Trustee may waive any such declaration upon the 
payment to it of all sums theretofore in default, and upon performance 
by the Railway Company of any other of its obligations under this 
lease which theretofore it shall have failed to perform, and thereupon 
the rentals remaining unpaid by the Railway Company shall become 
payable from time to time as provided in Article 3 of this lease. 


11. If the Railway Company shall have committed any act of de- 
fault, then at any time thereafter during the continuance of such default 
the T’rustee may take possession of any and all of the leased equipment 
and replacements, and may remove the same from the possession and use 
of the Railway Company; and for such purpose may enter upon the 
premises of the Railway Company; but the Railway Company agrees 
to deliver said leased equipment and replacements at its own cost at 
such place or places on its railroad as the Trustee may reasonably desig- 
nate and for such purpose to move or draw the said equipment in the 
usual manner and at the customary speed of freight trains, and further 
agrees to store the leased equipment and replacements upon its premises 
for the Trustee without charge until the Trustee shall remove the same 
therefrom. 


12. If the Railway Company shall have committed any act of de- 
fault, then at any time thereafter during the continuance of such default 
(and only after making the declaration provided for in Article 10 of 
this lease) the Trustee, with or without retaking possession thereof, 
may sell the leased equipment and replacements or any thereof, free 
from any and all claims of the Railway Company at law or in equity, 
in one lot and as an entirety or in separate lots. Any sale or sales 
hereunder may be held or conducted, at such place or places and at such 
time or times as the Trustee may specify, or as may be required by 
law, and without gathering at the place of sale the property to be sold, © 
and in general in such manner as the Trustee may determine, but so 
that the Railway Company may and shall have a reasonable opportunity 
to bid at such sale. Upon any’such sale, the Trustee itself may bid 
for and may become the purchaser of the property offered for sale or 
any part thereof, without accountability to the Railway Company in 
respect thereof except for payment of the purchase price and compli- 
ance with the terms of sale, and in settlement or payment of such pur- 


FORM OF EQUIPMENT TRUST 417 


chase price shall be entitled to have credited on account thereof the 
sums then due to the Trustee by the Railway Company under this lease. 

13. Each and every power or remedy hereunder specifically given to 
the ‘Trustee shall be in addition to every other power or remedy here- 
under specifically given or now or hereafter existing at law or in equity 
or by suit, and each and every power and remedy hereunder specifically 
given or otherwise so existing may be exercised from time to time and 
as often and in such order as may be deemed expedient by the Trustee; 
and the exercise or the beginning of the exercise of one power or remedy 
shall not be deemed a waiver of the right to exercise at the same time 
or thereafter any other power or remedy. No delay or omission of the 
Trustee or its assigns in the exercise of any right or power accruing 
upon any act of default as above defined shall impair any such right 
or power or shall be construed to be a waiver of such act of default 
or an acquiescence therein. 


14. If the Railway Company shall commit an act of default and 
during the continuance of such default the Trustee shall exercise any 
of the powers conferred upon it by Articles 10, 11 and 12 of this lease, 
all payments made by the Railway Company to the Trustee under this 
lease after such act of default, and the proceeds of any judgment col- 
lected by the Trustee from the Railway Company hereunder, and the 
proceeds of every sale by the Trustee hereunder of any of the leased 
equipment and replacements, together with any other sums which may 
then be held by the Trustee under any of the provisions of this lease, 
shall be applied by the Trustee in the order of priority following, viz.: 
First, to the payment of all proper charges of the Trustee and of all 
expenses properly incurred or advances properly made by the Trustee 
in accordance with the provisions of this lease, including the expense 
of any retaking of the whole or any part of the leased equipment and 
all expenses of any sale thereof, and next, to the payment of all sums 
of money due and payable to the Trustee under the provisions of this 
lease. 

After all such payments shall have been made in full, the title to any 
of the leased equipment remaining unsold shall be duly conveyed by 
the Trustee to the Railway Company to be held thereafter for its own 
use, free from any further liabilities or obligations to the Trustee. If, 
after applying all of such sums of money realized by the Trustee as 
aforesaid, there shall remain any amount due to the Trustee under the 
provisions of this lease, the Railway Company agrees to pay the amount 
of such deficit to the Trustee. If after applying as aforesaid the sums 
of money realized by the Trustee, there shall remain a surplus in the 
possession of the ‘Trustee, such surplus shall be paid to the Railway 
Company. 

15. It being desirable for the interests of both parties to this lease 
that any of the leased equipment which in any respect shall have become 


418 APPENDIX II 


unsuitable for the use of the Railway Company shall be promptly sold 
and replaced, it is mutually understood and agreed that at any time 
hereafter until title thereto shall become vested in the Railway Com- 
pany, the Trustee shall sell any pieces of the leased equipment or replace- 
ments held by the Railway Company under this lease upon the written 
request of the Railway Company, evidenced by a copy of a resolution 
of its Board of Directors or its Executive Committee certified by its 
Secretary under its corporate seal; provided, however, that the proceeds 
of such sale or sales, and any money paid to the Trustee as hereinafter 
provided, shall be received by the Trustee and by it shall be applied to 
the purchase of railroad rolling stock as specified by the Railway Com- 
pany, which in all respects shall be treated as hereinabove provided for 
replacements, and which shall become and shall be subject to this lease 
and to all the terms and conditions hereof. No such sale shall be 
made for less than the fair value of the parcel sold as in good repair 
at the time of sale, unless and until the Railway Company shall have 
paid to the Trustee the difference between the price at which it is to be 
sold and such fair value as in good repair. For this purpose, the fair 
value of the sold parcel as in good repair shall be considered to be the 
original cost thereof less five per cent (5%) of said original cost for 
each full year during which this lease has run prior to the date of sale. 

16. This agreement is simultaneously executed in several counter- 
parts, each of which shall be deemed 'to be an original and all collec- 
tively to be one and the same instrument. 

17. This agreement shall be binding upon and shall inure to the 
benefit of the parties hereto and their successors and assigns. 

IN WITNESS WHEREOF, National Trust Company, as Trustee under 
the aforesaid Agreement dated July 1, 1924, and South Coast Railway 
Company, have caused these presents to be signed in their behalf, re- 
spectively, and their respective corporate seals to be hereunto afhxed 
as of the day and year first above written. 


NATIONAL TRUST COMPANY 


By H. F. Wall, 
Attest: Vice-President. 
C. W. Tower, 
Assistant Secretary. [ CORPORATE 
SEAL | 


Signed, sealed and delivered as to 
National ‘Trust Company in the 
presence of 


C. C. Clinton, 
E. K. Thomas. re 


FORM OF EQUIPMENT TRUST 419 


SOUTH COAST RAILWAY COMPANY 
By Wm. R. Rhodes, 


Attest: President. 
Coals rost; 
Secretary. [CORPORATE 
SEAL | 


Signed, sealed and delivered as to 
South Coast Railway Company 
in the presence of 

C. C. Clinton, 
E. K. Thomas. 


[ ACKNOWLEDGMENTS | 


INVENTORY OF EQUIPMENT REFERRED TO IN FOREGOING LEASE. 


Mountain type locomotives, Nos. 401 to 420 inclusive, total 20 locomo- 
tives; to be built by Standard Locomotive Company. 

Switching locomotives, Nos. 251 to 255, inclusive, total 5 locomotives; 
to be built by Standard Locomotive Company. 

Passenger coaches, Nos. 121 to 123, inclusive, total 3 cars; to be built 
by The National Car Company. 

Steel underframe ventilated box cars, Nos. 20,201 to 20,400, inclusive, 
total 200 cars; to be built by The National Car Company. 

Caboose cars, Nos. 847, 849, 851, 883 to 899, inclusive, total 20 cars; 
to be built by The National Car Company. 

Wood underframe ballast cars, Nos. 4101 to 4200, inclusive, total 100 
cars; to be built by The National Car Company. 


i ‘ 
‘ r 
t 
4 
j 
4 
fh t 
t i 
7 
rt 
\ 
j 
F ' 
{ 
) 
Let 
‘ 


APPENDIX III 


FORM OF DEPOSIT AGREEMENT 


i) 
f 


i 
% 


THE CENTRAL RAILWAY COMPANY 
First MortcaceE Five Per Cent 50 YEAR Gotp Bonps 


DuE June 1, 1958 


DEPOSIT AGREEMENT 
Dated as of December 11, 1925 


George E. Hill, 
Chairman. 
William C. Brown 
Daniel J. Morgan, 
R. G. Read, 
Committee. 
Henry Grey, Secretary, | 


130 Pine Street, New York City. National Trust Company 


Root, Case & Gardiner, 200 Wall Street, New York City 
32 Nassau Street, New York City Depositary 
Counsel. 


Agreement dated as of December 11, 1925, between GrorcE E. 
Hitt, Wittiam C. Brown, Danie, J. Morcan and R. G. READ 
(hereinafter called the Committee), parties of the first part, and such 
holders of the First Mortgage Five Per Cent 50 Year Gold Bonds of 
The Central Railway Company as shall become parties hereto in the 
manner herein provided (hereinafter called the Depositors), parties 
of the second part, 


WITNESSETH: 


WuHeErEAS, The Central Railway Company executed its certain mort- 
gage (hereinafter called the Central First Mortgage) dated August 1, 
1908, whereby it conveyed its railroad property and franchises therein 
described to Peoples ‘Trust Company of New York, now National 
Trust Company of New York, as Trustee, to secure the payment of 
its First Mortgage Five Per Cent 50 Year Gold Bonds (hereinafter 
called the Bonds) ; and 


WueEreas, the properties of said The Central Railway Company were 
hereafter acquired by The New York and San Francisco Railroad Com- 
pany (hereinafter called the Company) ; and 


423 


424 APPENDIX III 


WHEREAS, a Receiver has been appointed for the Company and its 
property, including property covered by the Central First Mortgage, 
and default has occurred in the payment of the interest due on the 
Bonds on June Ist, 1925, and December Ist, 1925, and it is desirable 
that the holders of the Bonds should unite for the protection of their 
interests ; 


Now, THEREFORE, in consideration of the premises and the mutual 
agreements herein recited, and other advantages which will accrue to 
the Depositors respectively from a union of interests and concerted 
action, the Depositors, each for himself and not for any of the others, 
do agree with each other and the Committee as follows: 


First. ‘The above named parties of the first part, their associates 
and successors appointed as herein provided, are hereby constituted a 
Committee for the Depositors with the powers hereinafter specified. 


SECOND. Holders of the Bonds may become parties to this agree- 
ment by depositing their Bonds under the terms hereof, within such 
period, or periods and upon such terms as the Committee may from time 
to time, either generally or in specific instances, determine, with National 
Trust Company, which is hereby designated the depositary under this 
agreement and is hereinafter referred to as the Depositary, or with some 
agent or sub-depositary appointed for that purpose, as hereinafter pro- 
vided. Bonds in coupon form should have attached all unpaid coupons 
whether matured or unmatured and registered Bonds must be accom- 
panied by a properly executed transfer thereof in blank. With the 
consent of the Committee, holders of certificates of deposit issued in 
behalf of any other committee and representing any of the Bonds may 
likewise become parties to this agreement by depositing under the terms 
hereof their certificates of deposit in transferable form. After any such 
deposit no separate action shall be taken by a Depositor with respect 
to the Bonds, coupons or certificates of deposit so deposited. “The bonds 
and certificates of deposit deposited hereunder or agreed to be so depos- 
ited are sometimes referred to herein as the deposited securities; and 
any reference in this agreement to deposited securities shall include the 
coupons and claims to interest on any Bonds deposited or agreed to be 
deposited hereunder. ‘The deposited securities shall be held by the 
Depositary for the account of and subject to the order of the Commit- 
tee. The Committee, or the Depositary at the request and subject to 
the approval of the Committee, may designate any bank, trust company, 
banking house, firm or individual to act as agent of the Depositary or 
as a sub-depositary, within or without the United States, to receive upon 
deposit and to receipt for Bonds and certificates of deposit deposited 
hereunder, ‘to issue certificates of deposit therefor and to assist in the 
performance of any other duties imposed upon it either by this agree- 
ment or by the Committee. 


FORM OF DEPOSIT AGREEMENT 425 


For every such deposit appropriate certificates of deposit, issued by 
the Depositary (or by any sub-depositary, as the case may be), transfer- 
able as the Committee may determine and in such form as may be 
approved by the Committee, shall be delivered to the Depositors. The 
Committee may provide that certificates of deposit so issued may be 
entitled to registry in the name of the owner at the office of the Deposi- 
tary, or other sub-depositary or agent for registration appointed by 
the Committee or by the Depositary upon the request of the Com- 
mittee, and that the interests represented by such certificates of deposit 
shall then be transferable only upon the books of the Depositary or 
such other sub-depositary or agent for registration. Certificates of 
deposit may in the discretion and on the order of the Committee or in 
accordance with rules and regulations promulgated by the Committee 
be issued by the Depositary (or by an agent or sub-depositary, as the 
case may be) without registration and when any certificate of deposit 
is so issued, it may be treated by the Committee and the Depositary 
(or by any agent or sub-depositary, as the case may be) as an instrument 
transferable by delivery. Where a certificate of deposit is registered 
» as to ownership, as above provided, the Committee may provide that 
the same may be discharged from registry by being transferred to bearer, 
after which it shall again become transferable by delivery, and may 
again and from time to time be registered in the name of the owner 
or transferred to bearer as before. 

Upon the transfer of any certificate of deposit, whether upon the 
registry books in the case of registered certificates of deposit or by 
delivery in the case of non-registered certificates of deposit, the trans- 
feree shall have all the rights of the original Depositor and shall for 
all purposes be substituted for the prior holder, and shall be included 
under the term “Depositor.” The term “holder of certificate of de- 
posit” and substantially similar expressions shall mean the bearer for 
the time being of a non-registered certificate of deposit and the owner 
for the time being of a registered certificate of deposit, and the holders 
of the respective certificates of deposit may be treated as the absolute 
owners thereof and neither the Committee nor the Depositary shall be 
affected by any notice to the contrary. 

The Committee may, in its discretion, from time to time cause the 
registry books of the certificates of deposit to be closed for such period 
or periods as it may deem expedient. “The Committee may, under 
regulations to be adopted by it and approved by the Depositary, per- 
mit the issue of substitute certificates in case certificates are lost, stolen, 
mutilated or destroyed. ‘The Committee may appoint such registrar or 
registrars of certificates of deposit as it may determine and may make 
application or cause application to be made for the listing of said cer- 
tificates of deposit upon the New York Stock Exchange and elsewhere. 
The Committee may in its uncontrolled discretion allow holders of 


426 APPENDIX III 


Bonds or of certificates of deposit issued in behalf of other committees 
to become parties hereto without the actual deposit thereof, provided 
that such holders shall execute this agreement and shall give the Com- 
mittee assurance satisfactory to it that such Bonds or certificates of 
deposit shall be deposited when, if and as the Committee shall request 
such deposit, and all persons so becoming parties hereto do thereby vest 
in the Committee title to the Bonds or certificates of deposit so held 
by them respectively and shall be included in the term Depositors as 
used herein. “The Committee may also in its uncontrolled discretion 
refuse to receive the deposit of any particular Bonds or certificates of 
deposit. 

Tuirp. ‘The Committee is hereby vested under the terms of this 
agreement with the legal and equitable title to all the Bonds and 
coupons and certificates of deposit deposited hereunder, with the same 
force and effect as if the Committee were the absolute owner thereof, 
and the Depositors hereby assign and transfer the same to the Com- 
mittee, their respective successors and associates appointed as hereinafter 
provided, as joint tenants, and not as tenants in common. 

FourtH. Any moneys from time to time received by the Committee 
or the Depositary for principal and interest upon the deposited Bonds 
and coupons, or any proceeds of the same, may be paid over to the 
respective Depositors at the direction of and subject to regulations 
prescribed by the Committee. 


FirtH. On behalf of the Depositors, or any of them who desire it, 
the Committee in its uncontrolled discretion may procure loans, to the 
amount of any matured and unpaid interest, on the Bonds represented 
by the certificates of deposit of such Depositors, and advance the amount 
thereof to them, and for that purpose such Bonds with the coupons 
thereto appertaining on which loans are made may be pledged by the 
Committee on such terms as the Committee may in its uncontrolled 
discretion determine, but no Bonds may be pledged for such purpose 
except the Bonds on which such amounts of interest are advanced. In 
case such loans are made to any Depositor, an appropriate notation 
thereof shall be made by the Depositary upon his certificate of deposit. 


Upon the termination of this agreement, or upon the preparation, 
or approval and adoption, of any plan, the Committee is empowered 
to employ any equitable method it may deem wise for discriminating 
between certificates of deposit as to which this privilege has been availed 
of and those as to which it has not; but in no event shall any Depositor 
upon whose certificate of deposit such a loan has been made withdraw 
the Bonds represented by such certificate of deposit except upon ful- 
filling the requirements provided in Article Eleventh hereof and in 
addition thereto upon repayment to the Committee of such loan, with 
interest, to the date of withdrawal, at such rate as the Committee may 
determine. If any sum be realized by the collection of coupons or 


FORM OF DEPOSIT AGREEMENT 427 


interest installments, the amount of which has been advanced to any 
Depositors, the Committee may apply such sum to the repayment of 
said loans and interest so far as the same may be necessary. 

SIXTH. ‘The Depositors, in addition to vesting in the Committee 
the complete and absolute title to the Bonds, coupons and certificates of 
deposit deposited hereunder, hereby jointly and severally further con- 
stitute and appoint the Committee, as at any time constituted in 
accordance herewith, their only and exclusive agents and attorneys in 
fact for the purpose of carrying out this agreement, and hereby author- 
ize and empower the Committee to exercise all the rights and powers 
of owners of such Bonds and coupons under any of the provisions 
thereof or of the Central First Mortgage, or otherwise, as well as to 
take or cause to be taken or defend or participate in, such suits, actions 
or proceedings, at law or in equity, or before the Interstate Commerce 
Commission or any other commission or similar body or any govern- 
mental department, to enter into such transactions, execute such papers, 
and do or cause to be done such acts, whether under the Central First 
Mortgage, or otherwise, as the Committee may consider wise or proper 
in order to preserve or enforce the rights of the Depositors, or any 
of them; and also to rescind any action taken whenever the Committee 
may consider such rescission wise or proper for the same purposes. | 

The Committee is hereby further authorized, in respect of any cer- 
tificates of deposit issued in behalf of other committees which may be 
deposited hereunder, to exercise all the rights and powers of owners 
of such certificates of deposit under the agreements under which the 
deposited certificates of deposit were issued, to dissent from any plan or 
plans announced pursuant to the provisions of the agreements under 
which such certificates of deposit were issued, to withdraw from such 
agreements and to surrender any and all certificates of deposit deposited 
hereunder to the respective depositaries issuing the same and to receive 
in exchange therefor the Bonds, coupons and other property, if any, 
represented by such certificates of deposit. “The Committee may pay 
any and all amounts necessary to accomplish any such withdrawals. 
Such amounts shall be deemed advances by the Committee and shall 
be charged to the Depositor who deposited such certificate of deposit 
or to the general expenses of the Committee, as the Committee may 
determine. Payment of amounts so charged, in the uncontrolled dis- 
cretion of the Committee, may be made a condition precedent to the 
right of Depositors to withdraw from this agreement under the provi- 
sions hereof and to their right to receive Bonds, certificates of deposit, 
securities or other property under the terms of this agreement. 

All powers granted by this agreement may be exercised before or 
after the preparation, or approval and adoption, of any plan of reor- 
ganization or readjustment and before or after the sale or contract 
for the sale of the franchises, property or assets of the Company or any 


428 APPENDIX III 


part thereof. ‘The powers herein granted shall also be deemed to in- 
clude the power to consent from time to time to the issue of receivers’ 
certificates or other evidences of indebtedness, or obligations by re- 
ceivers in the possession of all or any part of the property covered by 
the Central First Mortgage, although such receivers may be acting in 
proceedings other than proceedings to foreclose the Central First Mort- 
gage, and to purchase the same. “The Committee may compromise, 
adjust, release and surrender any and all rights, claims, demands and 
security in respect of and for the Bonds and certificates of deposit 
deposited hereunder; and may sell or exchange said Bonds and certifi- 
cates of deposit for any consideration which it shall approve either for 
cash or for bonds or stock of any other company or for other property. 
The Committee may, upon such terms as it shall deem expedient, pro- 
cure the release or discharge of any lien upon the property of or any 
claim against the Company or of any affiliated, controlled or subsidiary 
company, or of any receiver or receivers, but the Committee shall not 
be bound to procure any such release or discharge. 


The Committee is specifically authorized to bid for and to purchase 
at any sale which may be held pursuant to any decree of foreclosure 
or sale under the Central First Mortgage or any other mortgage cover- 
ing property of the Company, or at any other sale of any of the prop- 
erties of the Company which may be held under the terms of said 
mortgages or to enforce liens on said properties, on such terms and 
at such prices as the Committee, in its uncontrolled discretion, may 
deem advisable, all or any part of the property which may be offered 
for sale. “The Committee may use the deposited Bonds and coupons 
in payment or in part payment of the purchase price therefor. 


‘The Committee may from time to time, as it may deem wise, in any 
manner, purchase, acquire, contract in regard to, deal in, sell, assign 
or dispose of any property, lease, chose in action or securities in which 
the Company has any interest, and also any franchises, property, securi- 
ties or obligations of the Company or of any related or affiliated cor- 
poration, and in general any property, obligations or securities which 
the Committee may deem related to the interests of the Depositors, or 
any of them. ‘To make payments therefor, or in regard thereto, and 
in general to carry out its powers under any of the provisions hereof, 
the Committee may use any funds or property at any time subject to 
its control and it may charge or pledge the deposited Bonds and coupons, 
or any part of them, to obtain funds to pay its expenses, to effect pur- 
chases or acquisitions, as above stated, or to discharge liens on property 
purchased by it, or in which it has an interest, and as otherwise stated 
herein. With regard to any property or securities acquired by it the 
Committee may exercise all rights of ownership, including voting rights. 

Any plan or agreement of reorganization or readjustment prepared, 
or approved and adopted, by the Committee as herein provided may 


FORM OF DEPOSIT AGREEMENT 429 


make provisions for any or all of the bonds, obligations, shares of stock, 
indebtedness or other property of or claims against the Company, or 
any predecessor, affiliated, related, allied, controlled, controlling or 
subsidiary corporation of the Company, or any corporation, partnership 
or individual which the Committee may deem related to the interest 
of the Depositors. 


‘The deposited securities and all property purchased or acquired by 
or-on behalf of the Committee under the authority conferred by any 
of the provisions of this agreement, if the Committee shall so deter- 
mine, shall be charged with the payment of the compensation of the 
Committee and its expenses, including as a part of the Committee’s 
expenses, wherever its expenses are referred to in this agreement, the 
compensation and expenses of the Depositary and of any agent or sub- 
depositary, and counsel fees, and also the payment of the indebtedness, 
obligations and liabilities of the Committee. 


SEVENTH. ‘The Committee shall have power to prepare and adopt 
a plan and agreement for the reorganization of the Company or of 
any afhliated corporation, or of its affairs and properties, or for the 
readjustment of its debt, which plan in the uncontrolled discretion of 
the Committee may include or deal with other properties, such plan 
to be in such form and to contain such terms and provisions as the 
Committee in its uncontrolled discretion may determine, or it may 
approve and adopt any such plan or agreement, although not prepared 
by it. 

Any such plan or agreement may constitute managers of the reorgani- 
zation or readjustment and provide for their compensation and expenses 
and all expenses of carrying it out, and may provide for syndicates or 
underwritings in respect of the securities to be issued under such plan 
or agreement, and members of the Committee may act as such managers 
or may be members of any committee or committees thereby constituted 
or therein referred to and may be members of any such syndicate or 
participate in any such underwritings. Any such plan or agreement 
may make provisions for the payment of the compensation, disburse- 
ments and expenses of the Committee and may charge with the payment 
thereof, or of any part thereof as well as of all or any part of the 
indebtedness, obligations and liabilities incurred by the Committee, the 
securities and property subject to such plan and agreement. Any such 
plan or agreement may contain any terms and provisions and confer 
upon the Committee or upon any other committee under such plan or 
agreement or, if such plan or agreement shall constitute managers under 
such reorganization or readjustment, upon the managers, any powers 
or authority which the Committee in its uncontrolled discretion may 
deem proper and expedient and may impose such conditions upon par- 
ticipation thereunder as the Committee may deem wise. 


430 APPENDIX III 


When the Committee shall have prepared, or approved and adopted, 
any such plan and agreement, a copy thereof shall be filed with the 
Depositary, and thereupon a brief notice of the fact of such preparation, 
or approval and adoption, and filing shall be given as provided in 
Article Fourteenth hereof, and such notice shall be conclusive notice as 
of the date of its first publication to all Depositors, whether or not they 
receive actual notice, of the preparation, or approval and adoption, of 
such plan and agreement by the Committee and of the filing of a copy 
thereof with the Depositary. 


Any Depositor may within thirty days from the date of the first 
publication of said notice file with the Depositary notice in writing 
of dissent from such plan and agreement. If within said period of 
thirty days Depositors holding certificates of deposit representing fifty 
per cent of the principal amount of the deposited securities shall so file 
notice of dissent from such plan and agreement, such plan and agree- 
ment shall not become effective, and the Committee may thereafter 
from time to time prepare, approve or adopt modifications thereof or 
supplements thereto or other plans and agreements, and give like notice 
as aforesaid. If within said period of thirty days Depositors holding 
certificates of deposit representing fifty per cent of the principal amount 
of the deposited securities shall not so file notice of dissent, then such 
plan and agreement shall in the uncontrolled discretion of the Commit- 
tee become effective and be binding on all Depositors who do not 
withdraw from this agreement as hereinafter provided, all of whom 
shall be conclusively and finally deemed for all purposes to have assented 
to said plan and agreement and the terms thereof and to be irrevocably 
bound and concluded thereby, whether or not they shall have expressly 
assented thereto or shall have received actual notice. In case any plan 
or agreement shall become effective as above provided, the Committee 
shall publish notice to that effect as provided in Article Fourteenth 
hereof and any Depositor who shall have filed notice of dissent from 
such plan and agreement as aforesaid may within twenty days after 
the first publication of such notice, upon the terms and conditions, set 
forth in Article Eleventh hereof, withdraw from this agreement and 
thereupon shall be entitled to receive securities or other property as 
provided in said Article Eleventh hereof and shall cease to have any 
rights hereunder. 


The Committee shall be fully authorized to carry out any plan and 
agreement which may become effective as above provided, or to assent to 
and codperate with the carrying out of such plan by the managers 
thereof, and shall have full power and authority to use, transfer or 
deliver under or in accordance with such plan and agreement, the de- 
posited securities and all or any part of the property purchased or 
acquired by or on behalf of the Committee under the authority con- 
ferred by any of the provisions of this agreement, as fully as though 


FORM OF DEPOSIT AGREEMENT 431 


such plan and agreement were a part hereof and had been expressly 
assented to by the Depositors. 

No Depositor shall have the right to withdraw from this agreement 
except in the event and upon the terms herein expressly permitted; 
but the Committee may, in its uncontrolled discretion, permit one or 
more Depositors to withdraw in other events and upon other terms. 


The Committee is empowered at any time after adoption or filing 
of such plan to abandon the same whenever in its uncontrolled discre- 
tion it shall deem that course to be wise. “The Committee may also 
at any time after preparation, or approval and adoption, or filing of 
any such plan amend the same as in its uncontrolled discretion it may 
see fit. Any such amendment shall be filed with the Depositary, but if 
in the judgment of the Committee, which shall be conclusive and 
binding, any such amendment shall materially alter the rights of Depos- 
itors, notice of such filing of amendment shall be given as provided in 
Article Fourteenth hereof, and in such event the Depositor shall have 
the same rights of dissent and withdrawal as in the case of the original 
filing of a plan with the Depositary and upon the same conditions. 
Successive amendments or abandonments aforesaid shall not affect the 
powers of the Committee thereafter to prepare or approve and adopt, 
or amend or abandon new plans. 


EicGHTH. No enumeration of special powers given to the Committee 
by any provisions of this agreement shall be construed to limit or restrict 
the general powers hereby conferred, or intended to be conferred upon 
it, and it is hereby expressly agreed that it is the intention of this 
instrument to confer upon the Committee in respect of Bonds or cer- 
tificates of deposit at any time deposited hereunder, and in all other 
respects, all powers which the Committee may deem necessary or expe- 
dient in and towards the furtherance of the general purposes of this 
agreement in any respect, even though such power be of a character 
not now contemplated. 

NintH. ‘The Committee as at any time constituted, and notwith- 
standing any vacancy, shall have all the powers, rights and interests of 
the Committee as originally formed. “The Committee may elect a 
Chairman and may appoint a Secretary, who need not be a member of 
the Committee and who shall keep a record of its acts and proceedings. 
It may from time to time choose such other ofhcers and designate or 
cause to be designated, such committees or sub-committees as it may 
see fit, and may confer upon any of its officers, committees or sub-com- 
mittees such powers as it may deem proper. “The Committee may from 
time to time add to its number by electing by votes of the majority 
of its members, as from time to time constituted, an additional member 
or additional members, and the member or members so elected shall have 
all the powers of a member of the Committee under this agreement 
and together with those herein named, or their successors, shall con- 


432 APPENDIX III 


stitute the Committee under this agreement with like force and effect 
as though they were specifically named herein. Any member of the 
Committee may resign by filing written notice of his resignation with 
the Chairman or Secretary of the Committee, and the Committee may 
settle any account or transaction with such member and give a full 
release and discharge to him upon such resignation. In case at any 
time a vacancy shall occur in the Committee by death or resignation, 
or from any other cause, such vacancy may, but need not, be filled by 
the vote or written consent of a majority of the members of the Com- 
mittee as existing for the time being. Notices of changes in the mem- 
bership of the Committee filed with the Depositary shall bind all parties 
hereto. } 

TENTH. A majority of the members of the Committee shall con- 
stitute a quorum for all purposes, and all the powers of the Committee 
may be exercised by a majority of its members either at a meeting or 
in writing or by telegraph or cable without a meeting. A member 
of the Committee may, by written proxy, authorize any person (who 
may, but need not, be another member of the Committee) to act in his 
place for any and all purposes. Any action taken by an officer or sub- 
committee, duly authorized thereto, shall be the action of the Commit- 
tee, and the certificate of the Chairman or Secretary as to any action 
by the Committee shall be conclusive upon and full protection to the 
Depositary and conclusive upon all Depositors as to all acts and things 
so certified to have been done by the Committee. ~The Committee 
may from time to time make, alter or rescind such rules and regulations 
for the transaction of its business as to it may seem advisable. 

The Committee may employ such depositaries, counsel, attorneys, 
accountants, engineers, experts and other agents and employees as it 
may deem expedient and may fix and pay the compensation for their 
services and may make such other expenditures as it shall deem necessary 
or appropriate for any of the purposes of this agreement, and the Com- 
mittee shall be entitled to a reasonable compensation for its own services, 
provided that in no event shall the Committee be authorized to exact 
or collect from the Depositors or the deposited securities any sums for 
expenses and compensation of the Committee exceeding two per cent 
(2%) of the face amount of the certificates of deposit issued hereunder, 
which sum, however, may be increased upon the consent in writing 
of the holders of fifty per cent or more of the face amount of such 
certificates of deposit. 

The Committee undertakes in good faith to endeavor to protect the 
interests of the Depositors, but the members of the Committee assume 
no further responsibility. 

Neither the Committee nor the Depositary assumes any responsibility 
or liability as to the genuineness, validity or regularity of any of the 
deposited Bonds, coupons, or certificates of deposit. Neither the De- 


FORM OF DEPOSIT AGREEMENT 433 


positary nor the Committee nor any member of the Committee nor the 
Secretary shall be liable for any action taken in good faith in the belief 
that any of the deposited Bonds or coupons or certificates of deposit, 
or other documents or signatures are genuine. Neither the Committee 
nor any of its members, nor the Depositary, shall be personally liable | 
for the acts of each other nor for any act or omission of any agent, 
attorney or employee selected in good faith, nor for any error of judg- 
ment or mistake of law, nor for anything other than wilful malfeasance 
of the party sought to be held liable. No statement, explanation, or 
suggestion contained in this agreement, or in any plan prepared, or 
approved and adopted hereunder, or in any communication or notice 
issued by advertisement or otherwise, or which may hereafter. be issued 
by the Depositary or by the Committee, is intended or is to be accepted 
as a representation or warranty or as a condition of deposit, subscription 
or assent under this agreement or any agreement supplemental hereto. 
No defect or error shall release any deposit under this agreement or 
affect or release any assent or subscription hereto made except by the 
written consent of the Committee. 

The Depositary shall incur no liability for anything done or per- 
mitted to be done at the request and direction of the Committee, or 
of any officer or sub-committee of the Committee, the deposited Bonds, 
coupons and certificates of deposit being intended and agreed to be held 
at the order and under the control of the Committee. ‘The Depositary 
shall be bound only to exercise reasonable care in the safekeeping of the 
deposited Bonds, certificates of deposit, and other securities and property 
which may be deposited with or held by it hereunder and to deal there- 
with in accordance with the directions of the Committee. “The direction 
of the Committee, or a majority thereof, shall be a complete justifica- 
tion for any action or omission to act on the part of the Depositary. 
The Depositary, upon the request of the Committee, shall keep necessary 
books for registration of the certificates of deposit issued hereunder. 
The Depositary may resign upon ten (10) days’ notice in writing to 
the Committee, and the Committee shall have power to remove the 
Depositary and from time to time fill any vacancy however arising in 
the office of the Depositary. In the event of any such resignation 
or removal the Depositary shall, upon receiving due and proper receipt 
and acquittance, deliver all cash, securities, property and records held 
by it to the new depositary. 

Any member of the Committee and any firm or corporation of which 
he may be a member or officer and the Depositary, or any of them, 
or their respective officers and agents, may make deposits under this 
agreement and shall be entitled, to the same extent as any other De- 
positor, to all the rights and benefits accruing hereunder. ‘They or 
any of them may be or become pecuniarily interested in any property 
or matters which are or may become subject to this agreement or to 


434 APPENDIX III 


any plan and agreement of reorganization and readjustment which the 
Committee may prepare or approve and adopt as herein provided, and 
may contract with, or deal with the Committee in the same manner 
as if they were not such members and as if they were in no way con- 
nected with the Committee, or be members or managers of any com- 
mittee or of any syndicate which may contract with the Committee 
or be formed in contemplation of, or in connection with any plan or 
agreement of reorganization or readjustment prepared or approved and 
adopted under the authority of this agreement, and may likewise be 
interested in any securities of any other corporation which the Com- 
mittee may acquire or deal in and may become interested in any cor- 
poration or property affiliated with the Company or related to the 
interests of the Company or of the Depositors. "They may become 
officers, directors, voting or other trustees, or stockholders of the Com- 
pany or of any corporation or corporations which may hereafter be 
formed in pursuance of this agreement or any plan prepared or approved 
and adopted hereunder. 


‘The members of the Committee, or any of them, may become mem- 
bers of any other committee for the protection of any other obligations 
or securities of the Company or any predecessor, affiliated or related 
company, and the Committee may act in codperation with any other 
committee so formed. 


ELEVENTH. Whenever by any provision of this agreement a right 
of withdrawal is conferred upon any Depositor, such Depositor, if he 
desire to exercise such right, shall, at the time of and as a condition 
precedent to such exercise, surrender to the Depositary his certificate 
of deposit in transferable form and pay to the Depositary for account 
of the Committee: (a) the amount of interest which may have been 
advanced in respect of any installment or installments of interest upon 
the Bonds represented by such certificate of deposit; (b) such sums as 
the Committee in its uncontrolled discretion shall fix as his fair pro- 
portion of the compensation and expenses of the Committee incurred 
to the date of such surrender, but not exceeding two per cent of the 
face amount of the certificates of deposit so surrendered (unless the 
amount which the Committee is entitled to collect for its expenses and 
compensation shall have been increased as provided in Article Tenth) ; 
and (c) at the election of the Committee, such sum as the Committee 
in its uncontrolled discretion shall fix as his ratable proportion of all 
other indebtedness, obligations and liabilities of the Committee incurred 
to the date of surrender; and thereupon such Depositor shall be entitled 
to the delivery of Bonds or of certificates of deposit issued in behalf of 
other Committees to the amount called for by his certificate of deposit, 
or his ratable share as determined by the Committee of the proceeds 
of or securities exchanged or substituted for such Bonds and certificates 
of deposit; and if the Committee shall have required payment of any 


FORM OF DEPOSIT AGREEMENT 435 


sum pursuant to subdivision (c) of this article, his ratable share of 
any other securities or property acquired by or in behalf of the Com- 
mittee and not previously or simultaneously sold, contracted to be sold 
or otherwise disposed of by the Committee, or, as the Committee in 
its uncontrolled discretion may determine, a certificate in such form 
and with such provisions as the Committee shall prescribe evidencing 
his ratable interest in such securities, stock or property and in the 
ultimate proceeds of any liquidation or other dealing therewith by the 
Committee. Depositors by such withdrawal shall thereupon and with- 
out any further act be released from this agreement and cease to have 
any rights thereunder or under any plan and agreement prepared or 
approved and adopted pursuant to this agreement; provided, however, 
that such withdrawal shall not in any wise affect any rights or powers 
of the Committee hereunder or reserved in any such certificate of inter- 
est to deal with any securities or property theretofore or thereafter 
acquired by or on behalf of the Committee, notwithstanding the issu- 
ance to such withdrawing Depositors of certificates of interest with 
respect to such securities or property. 


TWELFTH. ‘The Committee is hereby authorized and empowered to 
construe this agreement, and its construction of the same, made in good 
faith, shall be final, conclusive and binding. It may supply any defect 
or omission or reconcile any inconsistency in this agreement and may 
amend the same in such manner and to such extent as it shall deem 
necessary or expedient in order properly and effectively to carry out the 
general purposes of this agreement. It shall be the sole judge of such 
necessity or expediency. All amendments shall be filed with the De- 
positary, and if in the judgment of the Committee, which shall be con- 
clusive and binding, any such amendment does not materially alter the 
rights of Depositors, it shall, when so filed, become binding upon all 
Depositors without publication or notice. If in the judgment of the 
Committee any such amendment shall materially alter the rights of the 
Depositors, notice of filing thereof shall be given as provided in Article 
Fourteenth hereof. Any Depositor may at any time within fifteen days 
from the date of the first publication of said notice, upon the terms and 
conditions set forth in Article Eleventh hereof, withdraw from this agree- 
ment and thereupon shall be entitled to receive securities or property as 
provided in said Article Eleventh and shall cease to have any rights here- 
under. All Depositors who do not so withdraw within said period of 
fifteen days shall be conclusively and finally deemed for all purposes to 
have assented to any such amendment and shall be irrevocably bound 
thereby, whether they have actual notice thereof or not. 

THIRTEENTH. ‘The Committee, if for any reason it shall consider it 
expedient, may at any time terminate this agreement by giving notice of 
its election so to do in the manner provided in Article Fourteenth hereof. 
In such case Depositors, upon payment to the Committee of the amounts 


436 ; APPENDIX III 


provided in Article Eleventh hereof, shall upon surrender to the Deposi- 
tary of their certificates of deposit, in transferable form, be entitled to re- 
ceive securities or other property as provided in Article Eleventh hereof 
in respect of withdrawals under this agreement, subject, however, in 
each case, to any existing pledge thereof theretofore made under the pro- 
visions of this agreement and to any use which the Committee may have 
theretofore made thereof in the course of any reorganization or read- 
justment, or in the carrying out of any of the provisions of this agree- 
ment, and subject to such reasonable rules and regulations as the Com- 
mittee may prescribe. 

Depositors, by the receipt of the last or final installment of their share 
of securities, cash or property, distributed by the Committee under any 
plan, or otherwise, or by the surrender of their certificates of deposit, 
thereby release and discharge the Committee and the Depositary from 
all liability and accountability of every kind, character and description 
whatsoever. 

Within sixty days after the termination of this agreement the Com- 
mittee shall file with the Depositary a statement of its accounts, setting 
forth with all reasonable detail its receipts and disbursements, including 
among other things all amounts paid for engineering, accounting and ex- 
pert or other services and for the compensation of the members of the 
Committee. ‘The Committee shall thereupon give notice of the filing of 
such statement in the manner provided in Article Fourteenth hereof. A 
copy of the said statement shall be given to each member of the Com- 
mittee and the copy thereof deposited with the Depositary shall be sub- 
ject at all reasonable times to examination, but only by the members of 
the Committee and its representatives and by Depositors personally or 
by attorney in fact duly authorized thereunto in writing. Unless legal 
proceedings impeaching the correctness of such accounts shall be duly 
commenced within sixty days after the first publication of such notice, 
said accounts and transactions as against all parties interested therein 
shall be conclusively presumed to be in all respects correct, and the Com- 
mittee and the Depositary shall be released and discharged from all lia- 
bility and accountability of every kind and description arising out of this 
agreement or any action taken by the Committee, excepting only such 
liabilities to halders of outstanding certificates of deposit, or otherwise, 
as are expressly admitted in said statement. 

FouRTEENTH. Notice of the adoption of any plan of reorganization, 
and notice of any amendment thereof which in the judgment of the Com- 
mittee shall materially alter the rights of Depositors, and notice of any 
amendment of this agreement which in the judgment of the Committee 
shall materially alter the rights of Depositors, shall be given by publica- 
tion of such notice twice a week for two successive weeks in one daily 
newspaper of general circulation in the Borough of Manhattan, City of 
New York. All other notices to Depositors required hereby or provided 


FORM OF DEPOSIT AGREEMENT 437 


for herein or which the Committee shall deem proper to give, shall be 
given by publication of such notices once a week for two successive weeks 
in one daily newspaper of general circulation in the Borough of Man- 
hattan, City of New York. Any notice given in the manner provided 
in this Article Fourteenth shall be conclusive notice of the facts therein 
stated as of the date of its first publication with like effect as if it had 
been on said date personally delivered to each of the Depositors, whether 
or not such Depositors or any of them shall have had actual notice. In 
its’ discretion the Committee may also cause any such notice to be pub- 
lished in other newspapers and on such dates as it may determine. 

FIFTEENTH. ‘The period of five years is specified as the period within 
which the Depositors shall be entitled, subject, however, to the provi- 
sions of Article Eleventh hereof, to the return of the Bonds, coupons, and 
certificates of deposit which they have deposited hereunder, or the re- 
ceipt of new securities on reorganization or readjustment. 

SIXTEENTH. ‘This agreement shall be construed solely as an agree- 
ment among the parties hereto and as solely affecting and relating to the 
Committee and the Depositors and the Depositary, and no other person, 
firm or corporation shall have any right hereunder. ‘This agreement 
shall bind and benefit the several parties hereto and each and all the sur- 
vivors, heirs, executors, administrators, successors and assigns of said 
parties and of each of them. 

SEVENTEENTH. ‘This agreement may be executed in counterparts and 
all such counterparts shall be taken together as forming one agreement. 
Upon the execution of the agreement singly or in counterparts, by the 
Committee, or a majority of them, it shall be deposited with National 
Trust Company, the Depositary. By receiving a certificate of deposit 
issued by the Depositary the recipient or holder thereof shall thereby 
become and be a party to this agreement and be bound by its provisions, 
with the same force and effect as though an actual subscriber hereto. 

IN WITNESS. WHEREOF the members of the Committee have subscribed 
this agreement and the Depositors have become parties by depositing their 
securities and accepting certificates of deposit hereunder as above set 
forth or by signing these presents, all as of the date first above recited. 


GerorGE E. Hii 
WiLiiAM C. Brown 
DANIEL J. Morcan 
R. G. Reap 


' 
f f 
by Pei 
' 
( 
’ 
fi ; 


APPENDIX IV 


LISTING REQUIREMENTS OF NEW YORK STOCK 
EXCHANGE 


COMMITTEE ON STOCK LIST, 
NEW YORK STOCK EXCHANGE 


[Reprinted through courtesy of New York Stock Exchange. Page references made to 
conform to this appendix.] 


The Committee will meet Mondays at 3:15 P.M. 

An application, conforming to these requirements, signed by an execu- 
tive ofhcer of the applying corporation, voting trustees, or depositary 
committees, and nine printed or typewritten copies must be filed with 
the Secretary of the Exchange at least five days prior to date set for 
consideration. 

Applications must be accompanied by the required papers and agree- 
ments, and by a check for one hundred dollars for each $1,000,000 or 
portion thereof, of each class of security (including stock of the par value 
of $100 per share) or where stock of a par value of less than $100 per 
share check for one hundred dollars for each 10,000 shares or portion 
thereof or where stock without nominal or par value check for one 
hundred dollars for each 10,000 shares or portion thereof; checks to be 
drawn to the order of “Treasurer, New York Stock Exchange.” In 
addition, companies making application are required to pay cost of print- 
ing. Printers’ bills will be submitted directly to the applicant. 

An application for listing Governmental, State, County or Municipal 
securities must be signed by a properly accredited official or by financial 
representatives, and be accompanied by required check as above and re- 
quired papers. 

Specimen applications furnished on request. 

The employees of the committee on stock list are instructed 
to assist in the preparation of applications to list whenever so 
requested. No charge will be made for such service. 


REQUIREMENTS FOR ORIGINAL LISTING 
Stock. 


(For form of certificate eligible to be listed under this classification, and 
for list of papers to be furnished, see page 446 et seq.) 

Every application for an original listing of capital stock shall recite: 

A. Where incorporated. 

B. (1) Amount applied for (whether temporary or permanent certi- 
ficates) ; (2) authorized issue. 

C. (1) Date of charter; (2) duration. 

D. (1) Business; (2) eae rights or privileges under charter or 
by-laws. 

441 


442 APPENDIX IV 


E. (1) Whether capital stock is full paid; (2) non-assessable; and 
(3) whether liability attaches to shareholders. 


F. (1) Issues (by classes), dividend rate and par value; (2) total 
amount of each, authorized and issued; (3) increases and authority 
therefor, including (a) action by stockholders, (b) by directors and 
(c) by public authorities, etc.; (4) amount unissued, (a) options or con- 
tracts on same, (b) specific reservation for conversion. 


G. If preferred stock; (1) whether cumulative or non-cumulative ; 
(2) preferences, including (a) voting power; (b) dividends; (c) dis- 
tribution of assets on dissolution or merger; (d) redemption; (e) con- 
vertibility; (f) special provisions. 

H. Voting power of obligations of debt. 


I. (1) Purpose of issue; (2) application of proceeds; (3) amount 
issued for securities, contracts, property; description and disposition; (4) 
additional property to be acquired, with particulars, as required by para- 
graph N. 

J. (1) History of corporation; (2) of predecessor companies or firms, 
with location and stock issues (by classes) ; (3) conditions leading to new 
organization. 

K. ‘Tabulated list of constituent, subsidiary, owned or controlled com- 
panies showing (a) date of organization; (b) where incorporated; (c) 
duration of charter; (d) business; and (e) capital stock issues (by 
classes), par value, amount authorized, issued, owned by parent company. 


L. (1) Mortgage, and (2) other indebtedness showing, (a) date, 
(b) maturity, (c) interest rate, (d) convertibility, (e) redemption by 
sinking fund or otherwise, (f) amount authorized, and (g) amount is- 
sued; (3) similar information regarding mortgage and other indebted- 
ness of constituent, subsidiary, owned, or controlled companies. 


M. Other liabilities, joint and several, (1) guaranties, (2) leases, 
(3) trafic agreements, (4) trackage agreements, (5) rentals, (6) car 
trusts, etc., (7) terms of each, and provision for payment; (8) similar 
description of other agreements or easements; (9) similar information as 
to constituent, subsidiary, owned or controlled companies. 


N. (1) Description, location, nature and acreage of property, (a) 
owned in fee; (b) controlled; (c) leased; (2) railroads, mileage com- 
pleted, operated and contemplated; (3) equipment; (4) character of 
buildings and construction; (5) tabulated list of franchises showing 
(a) where granted, (b) date, (c) duration, (d) purpose; (6) timber, 
fuel or mining lands, water rights; (7) similar information as to con- 
stituent, subsidiary, owned or controlled companies. 

O. Policy as to depreciation. 

P. (1) Character and amount of annual output for preceding five 
years; (2) estimated output (character and amount) for current year; 
(3) number of employees. 


NEW YORK STOCK EXCHANGE LISTING 443 


Q. (1) Dividends paid or declared; (2) by predecessor, and con- 
stituent, subsidiary, owned or controlled companies. 

R. Financial statements; (1) earnings for preceding five years, if 
available, with interest charges, depreciation and federal taxes; (2) in- 
come and surplus account of recent date for at least two years, if avail- 
able; (3) balance sheets of same dates; (4) balance sheet giving effect 
to recent financing, if any; (5) similar accountings for predecessor, con- 
stituent, subsidiary, owned or controlled companies; (6) corporations 
consolidated within one year previous to date of application, income and 
surplus account and balance sheet of all companies merged and balance 
sheet of applying corporation; (7) if in hands of receiver within one year 
previous to date of application, (a) income account and balance sheet of 
receiver at time of discharge, and (b) balance sheet at close of receiver- 
ship. 

S. Agreements contained on pages 449 and 450. 

T.. Fiscal year. 


U. Place and date of annual meeting. 
V. Location of principal and other offices. 


W. Names of (1) directors, classified, with addresses; (2) officers; 
(3) transfer agents, with addresses; (4) registrars, with addresses. 


In addition to the above, applications from corporations which own or 
operate mines must recite: 

A. Patented and unpatented claims, by numbers. 

B. (1) Geological description of country; (2) location and descrip- 
tion of mineral and other lands; (3) ore bodies; (4) average value of 
ore; (5) character and analysis; and (6) methods of treatment. 

C. History of workings, (1) results obtained; (2) production each 
year. 

D. (1) Ore reserves compared with previous year showing sepa- 
rately as to character and metal content; (2) estimate of engineer as to 
probable life of mines; (3) probabilities by further exploration. 

E. (1) Provisions for smelting and concentration; (2) proximity of 
property to railway or other common carrier. 

F. Properties in process of development; income account if available; 
guarantees for working capital and for completion of development in 
event income account not available. 


G. Total expenditures for preceding five years for acquisition of new 
property, development, proportion charged to operations each year. 

H. (1) Policy as to depletion; (2) acquisition of new property; (3) 
new construction and development. 

I. Production by tons, number of tons of ore treated, average assay 
yield, percentage of extraction, recovery per ton of ore, for preceding five 
years, if available. 


444, APPENDIX IV 


In addition to the above, applications from corporations which own or 
operate oil and gas wells must recite: 

A. (1) Brief history of oil field; (2) geological description of 
see (3) character and gravity of oil. 

. (1) Total area of oil land (developed and undeveloped), (a) 
yee (b) leased, (c) controlled, (d) proven, (e) under exploitation, 
(f) Bivatties 

C. (1) Number of wells (oil or gas) on each aeanerEn (a) in oper- 
ation, (b) drilling, (c) contemplated, (2) average depth of wells drilled, 
(a) shallowest, (b) deepest, (c) probable life; (3) whether oil sands are 
dipping. 

D0 1) Gross daily production—initial and present; (2) annual gross 
production from each property for preceding five years, if available; (3) 
estimated gross production for current year. 

E. (1) Storage, capacity and location; (2) (a) amount of oil stored, 
(b) character, (c) value, (3) pipe line, (a) gauge, (b) capacity, 
(c) mileage. 

F. (1) Refineries, (a) capacity, (b) acreage, (c) employees, (d) 
products and by-products. 

G. Properties in process of development; income account, if available; 
guaranties for working capital and for completion of development in 
event income account not available. 


H. Total expenditures for preceding five years for acquisition of new 
property, well drilling and development, proportion charged to opera- 
tions each year. 

I. (1) Policy as to depletion; (2) acquisition; and (3) develop- 
ments of new properties. 

(Note: For requirements as to voting trust or stock trust certificates, 
or certificates of deposit, see page 446.) 


Bonds. 


(For form of securities eligible to be listed under this classification, and 
for list of papers to be furnished, see pages 446 et seq.). 

An application for an original listing of bonds shall recite all inform- 
ation required for listing stock, and 

A. (1) Full title; (2) amount applied for (whether tenor or 
permanent), denominations and numbers; (3) amount authorized and 
outstanding, authority therefor, aan (a) action by stockholders, 
(6) directors, and (c) public authorities, etc.; (4) whether bonds are 
coupon (registerable as to principal) or registered, interchangeable or 
exchangeable; (5) exchangeability or convertibility into other securi- 
ties, and terms. 


NEW YORK STOCK EXCHANGE LISTING AAS 


B. Names and addresses of trustees. 

C. (1) Date of issue and maturity; (2) interest rate; (3) places at, 
and dates for payment of interest and principal; (4) where registerable 
or transferable; (5) kind and standard of money, and options; (6) tax 
exemption; (7) whether redeemable or purchasable in whole or part by 
sinking fund or otherwise, showing (a) dates, (b) price, (c) duration and 
place of published notice; (8) specified reservation of stock for con- 
version. 

D. Provisions for declaration of principal due and payable in event of 
default of payment of interest, or other defaults, and waiver; percentage 
of outstanding bonds controlling trustee. 

IE. Purpose of issue and application of proceeds, similar to that called 
for by Paragraph I of the Requirements for Listing Stock; provisions 
as to additional issue. 

F, Disposition of bonds refunded, redeemed or purchased for sinking 
fund, and mortgage securing same. 

G. Mortgage or indenture provisions for (1) serial issues; (2) values 
in United States gold coin; (3) issuance in foreign languages and (4) 
that the English version governs; (5) terms of exchangeability of bonds 
payable in foreign places for bonds payable in United States or vice versa. 

H. (1) Security—Mortgage, indenture of trust, or other agreement; 
and (2) liens; (a) properties covered, (b) mileage of railway lines, (c) 
buildings, (d) equipment, (e) securities, (f) rights, (g) privileges, 
(h) titles, (i) franchises, (7) leases, etc.; (3) other liens covering same 
or any part of same properties, (4) guaranty and terms. 

I. Any unusual provisions or covenants contained in mortgage, or deed 
of trust. 


REQUIREMENT FOR LISTING oF ADDITIONAL AMOUNTS 


(For list of papers to be furnished, see pages 447 to 449.) 

Refer to previous applications and last application by number and 
date, and recite: 

A. Where incorporated. 


B. (1) Amount applied for; (2) amounts authorized and outstand- 
ing; (3) authority for issue, including (a) action by stockholders, (6) by 
directors, and (c) by public authorities, etc., (4) total amount applied 
for. 

C. (1) Purposes of issue; (2) application of proceeds; (3) amount, 
description and disposition of securities exchanged for new issues; (4) 
additional property acquired or to be acquired, with particulars as re- 
quired by paragraph N of the Requirements for Listing Stock. 


D. (1) Dividends paid and declared; also by constituent, subsidiary, 
owned or controlled companies; since previous application. 

E./ Changes, if any, in (1) charter, (2) by-laws, or (3) capitalization 
since previous application. 


44:6 APPENDIX IV 


F. Changes in property, if any, since previous application. 


G. (1) Character and amount of output since previous application or 
earnings as in application for original listing; (2) estimated output 
(character and amount) for current year; (3) number of employees. 


H. Income account, surplus account and balance sheet of recent date, 
also for constituent, subsidiary, owned or controlled companies, or a con- 


solidated income account, consolidated surplus account and a consolidated 
balance sheet. 


I. Policy as to depreciation and depletion. 


J. Fiscal year, place and date of annual meeting, location of offices, and 
names of officials as covered by Paragraphs ‘I, U, V and W on page 2. 
(Note: “When a corporation purposes to increase its authorized capi- 
tal stock, thirty days notice of such proposed increase must be officially 
given to the Exchange before such increase may be admitted to dealings.” 
(Note: “When the capital stock of a corporation is. increased through 
conversion of convertible bonds already listed, the issuing corporation 
shall give immediate notice to the Exchange and the Committee on Stock 


List may, thereupon, authorize the registration of such shares and add 
them to the list.”’) 


REQUIREMENTS FoR LISTING OF CERTIFICATES OF Deposit, VOTING 
TRUST or Stock TRusT CERTIFICATES, Etc. 


(For form of certificates eligible to be listed under this classification, and 
for list of papers to be furnished, see page 447 et seq.) 


Every application for the listing of certificates of deposit, voting trust 
or stock trust certificates, etc., shall recite: 


A. (1) Name of applicant; (2) amount applied for (whether tempo- 
rary or permanent certificates) ; (3) depositary; (4) security deposited, 
and whether listed; (5) registrar. 


B. (1) Date or agreement; (2) names of committee, or voting trus- 
tees; (3) terms of trust; (4) powers and duties of committee, trustees, 
or depositary. 

C. Reasons for deposit. 


D. (1) Duration of trust or deposit; (2) extensions or limitations; 
(3) final date of deposits; (4) provision for deposits without penalty 
for approximately thirty days after listing, or if no time limit for deposit 
of securities without penalty is fixed, an agreement that approximately 
thirty days’ notice of such limitation of time shall be published and given 
to the Stock Exchange; (5) date of presentation of plan; (6) provisions 
for dissent and withdrawal; (7) percentage necessary to adoption; (8) 
pro rata charges; (9) provisions for return of securities (or equivalent) ; 
(10) provision for payment of interest, dividends, etc. 


NEW YORK STOCK EXCHANGE LISTING = 447 


E. Applications to list Voting Trust or Stock Trust Certificates to 
recite financial statements of company as in paragraph R on page 


ane 


F. Agreement to deliver definitive securities at termination of Voting 
Trust or Voting Trust to be extended. 


G. Agreement to have definitive securities listed. 


H. Agreement by Voting Trustees to have company publish its 
financial statements. 


I. Agreements contained on pages 449 and 450. 


Note: Applications to list voting trust or stock trust certificates and 
certificates of deposit for securities not a delivery on the Stock Exchange, 
must, in addition, comply with the Requirements.) 


Applications for each class of deposited securities shall be separate and 
certificates issued of distinctive colors. 


Papers to Be Filed with Applications. 


In addition to application for listing, the following papers must be 


filed: 
For stocks: 


1. ‘Three copies of charter, with amendments to date, one copy at- 
tested by proper public authority. 


2. Three copies of by-laws, with amendments to date, one copy at- 
tested by an executive officer of corporation. 


3. Three copies of leases, franchises, easements and special agreements, 
one copy of each attested by an executive officer of corporation. 


4, One copy of resolutions of stockholders and directors and copy of 
proper public authority authorizing issue, each attested by an executive 
officer of corporation. 

5. One copy of resolutions of stockholders or directors, and copy of 
proper public authority, authorizing issue of stock on conversion of other 
securities, attested by an executive officer of corporation. 

6. One copy of resolutions of stockholders or directors directing speci- 
fic reservation of authorized stock for conversion, attested by an executive 
officer of corporation. 

7. One copy of resolutions of stockholders, board of directors, or 
executive committee attested by an executive officer of corporation, au- 
thorizing, by name, official to appear for listing securities (form may be 
had on application). 

8. Opinion of counsel (not an officer or director of the corporation) 
as to legality of (a) organization, (b) authorization, (c) issue, and (d) 
validity of securities. The Committee will not accept the opinion of an 
officer or director of an applying corporation nor of a firm in which the 
officer or director is a member, as counsel on any legal question affecting 


448 APPENDIX IV 


the corporation; nor will it accept the opinion of an officer or director of 
a guarantor corporation nor of a firm in which the officer or director is a 
member, on any legal question affecting the issuance of guaranteed 
securities. 

9. Six copies of detailed distribution of securities, one certified (form 
may be had on application). 

10. One copy of resolution appointing transfer agent and registrar, 
attested by an executive officer of corporation. 

11. Certificate of registrar of amount of securities registered at date 
of application. 

12. Report of qualified engineer covering actual physical condition of 
property at recent date. 

13. Map of property and contemplated extensions. 

14. Specimens of all securities to be listed. 

15. Questionnaire (form may be had on application). 

16. Certified copy of income account, surplus account and balance 
sheet contained in application. 

17. Agreements. 


For bonds: 


18. All papers required for listing stocks and also ten copies of the 
mortgage or indenture, one copy (a) certified to by trustee, (b) with 
copies of all certificates of proper recording. 

19. Trustees’ certificate required on page 450. 

20. One copy of resolutions of stockholders or directors, and copy of 
proper public authority, authorizing issue of stock on conversion of bonds, 
attested by an executive officer of corporation. 

21. One copy of resolution of stockholders or directors directing speci-. 
fic reservation of authorized stock for conversion, attested by an executive 
officer of corporation. 

22. Certificate of disposition of securities redeemed or refunded. 

23. Certificate as to collateral deposited. 

24. Certified copy of release or satisfaction of underlying mortgages. 


For securities of reorganized corporations: 


1. All papers required for listing stocks and bonds. Opinion of coun- 
sel shall state that proceedings have been in conformity with legal re- 
quirements, that title to property is vested in new corporation and is free 
and clear from all liens and incumbrances, except as distinctly specified ; 
and also as to equities of securities of predecessor corporation. 

2. Certified order of court confirming sale on foreclosure or other 
authority for reorganization. 

3. Certified copy of plan of reorganization. 

4, Certified income and surplus account and balance sheet at close of 
receivership, if available. 

5. Certified balance sheet at date of reorganization. 


NEW YORK STOCK EXCHANGE LISTING 449 


For additional amounts: 

1. Nos. 4, 5. 6, 7, 8, 9, 11, 15, 16, 17 of papers required for original 
listings. 

2. Nos. 1, 2, 3, 10, 12, 14 of said papers for stock, if any changes have 
occurred therein since previous application. 

ON Osea ey street LO ohy 19% 20) Zio 2n23. 24 of) said 
papers for bonds, if any changes have occurred therein since previous ap- 
plication. 

4. Certified copy of proper public authority for increase. 


For certificates of deposit, voting trust, etc.: 


1. Papers required for listing stocks and bonds. 

2. Certified copies of any legal proceedings and court orders. 

3. Three copies of deposit or trust agreement, one certified to by 
proper authority. 

4. Three copies of circulars, issued by trustees or committee, one cer- 
tified to by proper authority. 

5. Certificates of amounts deposited. 


Agreements. 


To be made part of applications where applicable: 


1. Not to dispose of an integral asset or its stock interest in any con- 
stituent, subsidiary, owned or controlled company, or allow any of said 
constituent, subsidiary, owned or controlled companies to dispose of an 
integral asset or stock interest in other companies, unless for retirement 
and cancellation, without notice to the Stock Exchange. 

2. To publish once in each year and submit to the stockholders, at 
least fifteen days in advance of the annual meeting of the corporation, a 
statement of its financial condition, a consolidated income account cover- 
ing the previous fiscal year and a consolidated balance sheet showing assets 
and liabilities at the end of the year; or an income account and balance 
sheet of the parent company and of all constituent, subsidiary, owned or 
controlled companies. 

3. To maintain, in accordance with the rules of the Stock Exchange, 
a transfer office or agency in the Borough of Manhattan, City of New 
York, where all listed securities shall be directly transferable, and the 
principal of all listed securities with interest or dividends thereon shall 
be payable; also a registry office in the Borough of Manhattan, City of 
New York, other than its transfer office or agency in said city, where all 
listed securities shall be registered. ' 

4. To notify the Stock Exchange thirty days in advance of the effective 
date of any change in the authorized amounts of listed securities. 

5. Not to make any change in listed securities, of a transfer agency or 
of a registrar of its stock, or of a trustee of its bonds or other securities, 


450 APPENDIX IV 


without the approval of the Committee on Stock List, and not to select 
as a trustee an officer or directur of the company. 

6. To notify the Stock Exchange in the event of the issuance or crea- 
tion in any form or manner of any rights to subscribe to, or to be 
allotted, its securities, or of any other rights or benefits pertaining to 
ownership in its securities, so as to afford the holders of its securities a 
proper period within which to record their interests, and that all rights 
to subscribe or to receive allotments and all other such rights and bene- 
fits shall be transferable; and shall be transferable, payable and deliver- 
able in the Borough of Manhattan, City of New York. 

7. To notify the Stock Exchange of the issuance of additional amounts 
of listed securities, and make immediate application for the listing thereof. 

8. To publish promptly to holders of bonds and stocks any action in 
respect to interest on bonds, dividends on shares, or allotment of rights 
for subscription to securities, notices thereof to be sent to the Stock Ex- 
change, and to give to the Stock Exchange at least ten days’ notice in 
advance of the closing of the transfer books or extensions, or the taking 
of a record of holders for any purpose. 

9. ‘To redeem Preferred Stock in accordance with the requirements. 

10. To notify the Stock Exchange if deposited collateral is changed 
or removed. 

11. To have on hand at all times a sufficient supply of certificates 
to meet the demands for transfer. 


The Committee recommends a date be fixed as record for dividends, 
allotments of rights and stockholders’ meetings, without closing the trans- 
fer books. 


Notice of rights, allotments, subscription privileges, to bondholders 
and shareholders, should be as of a date after authorization. 


a 


Trustees of Mortgages. 


The Committee recommends that a trust company or other financial 
corporation be appointed trustee of mortgages, indentures, and deeds of 
trust; and when a State law requires the appointment of an individual as 
trustee, a trust company or other financial corporation be appointed as 
co-trustee. 

Each mortgage, indenture, or deed of trust should be represented by 
a separate trustee. 


The Committee will not accept as trustee: 


(a) An officer or director of the issuing corporation; 

(b) A corporation in which an officer of the issuing corporation is an 
executive officer. © 

The trustee shall present a certificate accepting the trust and certifying 
(1) securities are issued under the terms of the mortgage or indenture, 
giving the numbers, denominations and amount certified; (2) collateral 


NEW YORK STOCK EXCHANGE LISTING 451 


deposited ; (3) disposition of prior obligations. For additional issues of 
bonds, the trustee must certify that (1) increase is in conformity with 
terms of mortgage or indenture; (2) additional collateral deposited ; and 
(3) disposition of prior obligations. 

‘The company and trustee shall notify the Stock Exchange of the hold- 
ing, cancellation, or retirement of securities, by redemption, through 
the operation of sinking fund or otherwise. 

The trustee must notify the Stock Exchange if deposited collateral is 
changed or removed, and furnish a list of collateral substituted. 


A change of trustee shall not be made without the approval of the 
Committee. 


Transfer and Registry. 


Every corporation whose securities are listed upon the Stock Exchange 
must, in accordance with the rules of the Exchange, maintain (a) a 
transfer office and (b) a registry office, both in the Borough of Man- 
hattan, City of New York. ‘The transfer agency and registrar shall not 
be identical, and both must be acceptable to the Committee. A company 
cannot act as registrar of its own stock. 

Where a stock is transferred at the company’s office, the transfer agent 
or transfer clerk shall be appointed by specific authority of the board of 
directors to countersign certificates, in said capacity, and shall be other 
than an officer who is authorized to sign certificates of stock. 

‘The entire amount of the capital stock of a corporation listed upon the 
Stock Exchange must be directly transferable at the transfer office of the 
corporation in the Borough of Manhattan, City of New York. When a 
corporation makes transfer of its shares in other cities, certificates shall 
be interchangeably transferable, and identical in color and form, except 
as to names of transfer agent and registrar; and the combined amounts 
of stocks registered in all cities shall not exceed the amount authorized 
to be listed. 

Interchangeable certificates must bear a legend reciting the right of 
transfer in New York and other cities. 

The registrar must file with the Secretary of the Stock Exchange an 
agreement to comply with the requirements in regard to registration and 
not to register any listed stock, or any increase thereof, until authorized 
by the Committee. 

Certifications of transfer and registry must be dated and signed by an 
authorized officer of the transfer agent and registrar, respectively. 

A change in the form of a security, of a transfer agency, or of a regis- 
trar, shall not be made without the approval of the Committee. 


452 APPENDIX IV 


ForMs OF CERTIFICATES, ENGRAVING, ETc. 
General Requirements. 


(See Specific Requirements below.) 


All securities for which listing upon the Exchange is requested, ex- 
cept as otherwise herein stated must be engraved and printed in a manner 
satisfactory to the Committee from at least two steel plates by an engrav- 
ing company whose work the Committee is authorized by the Governing 
Committee to pass upon; the name of the engraving company must 
appear upon the face of all securities and also upon the face of coupons 
and the title panel of each bond. Securities must bear a vignette upon 
their face. 

Said plates shall be: (1) 4 border and tint plate from which should 
be made a printing in color underlying important portions of the face 
printing; (2) A face plate containing the vignettes and descriptive or 
promissory portion of the document, which should be printed in black 
or in black mixed with a color. ‘The combined effect of the impression 
from these plates must be as effectual security as possible against counter- 
feiting. 

The printing of securities must be in distinctive colors, to make classes 
and denominations readily distinguishable. 

All certificates, except as otherwise stated herein, must provide for 
transfer and for registration with dates. When a corporation makes 
transfers of its shares in other cities, certificates shall be identical in 
color and form, except as to names of transfer agent and registrar; 
certificates interchangeably transferable must bear a legend reciting 
the right of transfer in New York and other cities. 

The Committee recommends that the text of securities shall provide 
for transfer in person or by duly authorized attorney upon surrender 
of the security properly endorsed. 

A change in the form of a security, transfer agency, registrar, or 
trustee of bonds, shall not be made without the approval of the Com- 
mittee. 

The Committee will object to any security upon which an impress 
is made by a hand stamp, except for a date or power of substitution. 


Bonds. 


(In addition to the General Requirements above outlined, the following 
apply specifically to bonds.) 

All bonds must be fully engraved and printed in a manner satisfac- 
tory to the Committee; face of bonds and coupons must bear a vignette. 

The text of bonds should recite conditions of issuance, tax exemption, 
terms of redemption (by sinking fund or otherwise), convertibility, 
default, interchangeability or exchangeability of coupon and registered 
bonds, and conversion into other securities. 


NEW YORK STOCK EXCHANGE LISTING 453 


Bonds, in the text and on the reverse, must recite payment of prin- 
cipal and interest in the Borough of Manhattan, City of New York, 
and provide for transfer and registration. Coupons must recite pay- 
ment of interest in the Borough of Manhattan, City of New York and 
tax exemption. 


Registered bonds must carry a power of assignment in such form 
as the Committee may approve. 


The Committee recommends that registered bonds be made inter- 
changeable with coupon bonds. 


Registered bonds interchangeable with coupon bonds shall bear a 
legend reciting numbers and denominations of coupon bonds, against 
which they are issued. 

If coupon bonds of any denomination are interchangeable with cou- 
pon bonds of other denominations they shall contain such recital in 
the text and bear an appropriate legend on the reverse. 


Registered bonds made such by detaching coupon sheets are not eligible 
for listing. 


Forms of Legends for Bonds. 


For coupon bonds of one denomination interchangeable with coupon 
bonds of other denominations: 


“As provided in the Indenture, coupon bonds of the denominations 
of $1,000, $500 or $100, at any time outstanding, when surrendered 
with all unmatured coupons attached and upon the payment of 
charges, may be exchanged for an equal aggregate principal amount 
of coupon bonds of any other denomination of the same issue, of 
numbers not contemporaneously outstanding, with all unmatured 
coupons attached.” 


For a coupon bond of a thousand dollars exchangeable for coupon bonds 
of smaller denominations: 

“The holder of this bond may, at his option, on surrender and can- 
cellation and on payment of charges, as provided in the indenture, 
receive in exchange coupon bonds of this issue for an amount aggre- 
gating $1,000 in denominations of $............ of numbers not 
contemporaneously outstanding.” 


For coupon bonds of smaller denominations exchangeable for a $500 
or a $1,000 coupon bond: 

“The holder of this bond may, at his option, on surrender and 
cancellation of this bond and others of the same issue aggregating 
$500 or $1,000 and on payment of charges, as provided in the inden- 
ture, receive in exchange a coupon bond of this issue of a number 
not contemporaneously outstanding, for the amount aggregated.” 


454 APPENDIX IV 


For registered bond(s) iasued for coupon bond(s) of denomination (s) 


of less than $1,000: 


“This bond is issued in exchange for coupon bond(s) of this issue 
MUMDEred Re ewe in denominations of $............ not con- 
temporaneously outstanding, aggregating the face value hereof and 
coupon bond(s) of this issue bearing the said number(s) and of the 
same denomination(s) will be issued in exchange for this bond upon 
surrender, cancellation and payment of charges provided in the 
indenture.” 


For registered bond(s) issued for $1,000 coupon bond (s) : 


‘This bond is issued in exchange for coupon bond(s) of this issue 
numbered wiyyy)s ewe ea cary for $1,000 (each), not contemporaneously 
outstanding, and coupon bond(s) of this issue bearing the said num- 
ber(s) will be issued in exchange for this bond upon surrender, can- 
cellation and payment of charges provided in the indenture.” 


Stock. 


(In addition to the above General Requirements, the following apply speci- 
fically to stock certificates. ) 


The border and tint plate for one-hundred share certificates of stock 
shall have said denomination engraved thereon in words and figures; 
the plates for smaller amounts shall bear some engraved device whereby 
the exact denomination of the certificate may be distinctly designated 
by perforation; also conspicuously upon the face “Certificate for less 
than one hundred shares.” 

Certificates for every class of stock shall recite preferences of all 
classes. 


Certificates of stock shall recite (1) ownership; (2) par value; (3) 
whether shares are full paid and (4) non-assessable; (5) preference 
as to dividends; (6) distribution of assets upon dissolution or merger; 
(7) terms of redemption; (8) convertibility; (9) voting power, or 
(10) other privilege; and (11) must bear the following legend: 

This certificate is not valid until countersigned by the transfer agent, 
and registered by the registrar. 


The following form is required upon the reverse of a certificate of 
stock: 


NEW YORK STOCK EXCHANGE LISTING = 455 


For value received........... hereby sell, assign 

Vie) LEV SEL ai 11 Dh 6 0) 2), cule alae long BRDU, ear aaEs Pepe ees 
(eat Aehsy = Slseae hes NAA Gs A tee shares 5 23 ee <L a y 
of the *capital stock represented by the within pe alia IC has 
: » : 8 Ory i a 5 cy 
certificate and do hereby irrevocably constitute Hay ors a 

. a 

OMI chet ahe ecey egr tii! u's glace attorney we to B Sant 
to transfer the said stock on the books of the putes ao esta 
ae, 2k Sane Be 
within named company with full power of sub- em 4 >. 8 % 
stitution in the premises. Lae Ae iC A 
Spree aa 
PLE ey P's cA elas ws % y 19 REN ad et 
ammaga®,” 
2, ace aR Ar ny ER Sep8F ge. 
suites 
I Ua ae 
In presence of oo) Bu ES es 


eeceoeeee eee ee eee eee ee © 8 ow @ @ 


*On certificates without nominal or par value the word “capital” may be 
omitted. 


Certificates of Deposit, Voting Trust Certificates, Etc. 


In addition to the General Requirements above outlined, certificates 
of deposit and voting trust certificates must conform in every particular 
to the Specific Requirements as to stock certificates, except that the 
descriptive portion of a certificate of deposit may be typed satisfactorily 
to the Committee. 


Temporary Certificates or Receipts. 


Temporary certificates or receipts must conform to the General Re- 
quirements above outlined and to the Specific Requirements as to stock 
certificates, except that the text may be typed satisfactorily to the Com- 
mittee, and need not bear a vignette. 


REMOVALS OR SUSPENSIONS IN DEALINGS OF LISTED SECURITIES 


Whenever it shall appear that the outstanding amount of any security 
listed upon the Stock Exchange has become so reduced as to make 
inadvisable further dealings therein, the Committee may direct that 
such security be removed from the list and further dealings therein 
prohibited. | 

The Governing Committee may suspend dealings in the securities of 
any corporation previously admitted to quotation upon the Exchange, 
or it may summarily remove any securities from the list. 


456 


SBA Sia 


APPENDIX IV. 


REQUIREMENTS FOR LISTING FOREIGN GOVERNMENT BONDS 


Data to Be Requested by New York Stock Exchange 
in Connection with Proposed Listings. 


(a) Statement of debt, internal and external, and currency in 
which it is to be paid; statement of external debt to be 
computed in dollars. 

(b) Contingent and actual liabilities, and priority. 

(c) Revenue or assets pledged, if any, under present and other 
loans, and nature of administration. 

(d) Summary of such revenue receipts and income from such 
assets for preceding five years, stated in dollars, if available. 

(e) Status of the law under which said revenue or assets are 
pledged. 


Past debt record with respect to: 

(a) Defaults. 

(b) Scaling down interest payments. 

(c) Suspending sinking fund payments. 

Where listed. 

Currency in which interest and principal are to be paid. 

Tax liability and exemption. 

Statement of governmental income and expenditure for whatever 
account in the preceding five years. 

Statement of the sums required in dollars to meet foreign interest 
charges in each of the five preceding years. 

Statement in terms of weight and dollars (converted) of mer- 
chandise imports and exports in each of the preceding five years. 

Statement of covenants, if any, with respect to payment of prin- 


cipal and interest of bonds dependent upon state of Peace or 
War and nationality of holder. 


INDEX 


A 


Acceptance of trust, 152 

Accountants, approval by trustee, 111 

Addressograph plates, 57, 63, 65, 261 

Administration department, 6 

Administrators and transfer of stock, 
247, 248 

Adoption of plan of reorganization, 
207 

After-acquired property clause, 77 

American share certificate, 178, 179 

Analysis of departmental income and 
expenses, 302 

Application for bonds. 
Issue. 

Assessments in reorganization, 208 

time limit, 211 
underwriting of, 208 

Assignment of stock, 243 

Assumption of mortgage, 158, 159 

Attorney for transfer of stock, 243 

Audit department, 6 

Audit of securities, 45, 255, 277, 296 

Authentication. See Certification. 

“Authorized” issued under mortgages, 
90 


See Bond 


B 


Balance sheet, prerequisite to bond 
issue, 96 

Baltimore & Ohio Railroad Company, 2 

Bankers, activities in reorganization, 
190, 191 

supervision by, 163 

Bank. See Trust Company. 

Bankers’ share certificates, 175, 176, 
177 

Bankers Trust Company v. Denver 
Tramway Company, 117 

Banking department of trust com- 
pany, 4 

Banking institution, executives of, 7 

Bearer certificates, 179 

Bibliography, 319 

Billing of fees, 312 

Blotter for Corporate Trust securities, 
47, 48 

Bond department, 6 


Bondholders’ committee, may consent to 
change in mortgage, 142 
relation with trustee, 146 
Bondholders’, reluctance to deposit, 197 
rights as to redemption, 123 
Bond issue, acquisition of property, 90 
acquisition of securities, 92 
adjustability, 78, 79 
against cash, 97 
balance sheet required, 96 
capital expenditure reimbursement, 
91 
certificates of officers, etc., 95 
consent of junior trustee, 101 
counsel’s opinion, 96, 99 
delivery entries, 39, 56 
earnings statement required, 96 
for immediate needs, 91 
indeterminate, 78 
initial, 91 
in series, reasons for, 78 
net earnings as prerequisite, 95 
order for delivery, 95 
pending construction, 92 
percentage of property cost, 94 
permanent additions, 91, 93, 94 
principal purposes, 91 
provided no default, 94 
receipt for delivery, 99 
refunding, 92-93 
resolution to authorize, 95 
restrictions, 94 
to refund, 91 
under corporate mortgage, 90 
Bond of indemnity, against duplicate 
bond, 87 
against duplicate stock certificate, 
269 
as affecting registrar, 277 
Bond owner, who is deemed, 85 
Bond payment agent, 185 
Bond registrar, appointment of, 278 
duties, 279 
fees, 309 
records of, 281 
Bond registration. See Registration of 
bonds. 


ADS 7 


458 


Bonds 
authorized issues, 78 
collateral trust, 16 
comparison of, 76 
convertible, 17 
cremation of, 162 
described, 75, 76 
destroyed, 85 
disposition after 
foreclosure, 151 
equipment, 16 
exchange of denominations, 84, 85 
execution of, 83 
foreign currencies, 18 
form of, 79, 80, 81 
franc, 18 
full registration, 280 
gold, 18 
guaranteed, 18 
issuance before recording, 89 
joint, 18 
limitations to amount issued, 78 
lost, 85 
mutilated, 35 
outstanding, defined, 117 
participating, 17 
registration as to principal, 281 
serial, 17 
signatures to, 83 
sinking fund, 17 
specimen of, 29 
stamped after foreclosure sale, 147, 
150 
sterling, 18 
stolen, 85 
unsecured, 17 
See Mortgage. 
Bond title, illustration of use, 18 
Bond transfer agent. See Bond Reg- 
istrar. 
Bookkeeping department, 4 
Breach of covenants, trustee’s proced- 
ure, 112 
By-Laws of corporation, 28, 233 


Cry 
Called bonds, affecting coupon-paying 
department, 298 
coupons from, 298 
“Calling” bonds. See Redemption. 
Canceled bonds, audit of, 45 
Canceled coupons, retention of, 300 
Canceled stock certificates, destruction 
of, 269 
Cancellation memorandum, 60 
Cancellation tickets discussed, 55 


endorsement on 


INDEX 


Capital expenditures, bases for sinking 
fund withdrawal, 121, 122 
reimbursement by bond issue, 91 

Capital subscription, 215 
discussed, 189 
fees, 310 
papers required, 219 
Cash deposited against bond issue, 97 
journal, 68 
ledger, 67 
records, 66 
tickets, 68, 69, 70 
under equipment trust, 166 
with other banks, 98 
Cash deposit for interim receipts, 171 
Certificate of deposit, for bonds, 194 
for stock, 195 
listing of, 197 
of other committees, 201 
registration of, 198 
Certificates of indebtedness, issuance 
against lost bond, 87, 88 
Certification, blotter, 47, 49 
charges, 303, 304 
essential to validate, 83 
slip, 49 
trustees’ responsibility, 90 
Charter of corporation, certificate of 
incorporation, 27, 233 
Check register, Coupon Department, 
292 
Classification of stock, 227 
“Closed” mortgage, 90 
Closing of transfer books, 260 
“Closing” transaction explained, 91, 92 
Collateral, fees for holding, 305 
Collateral to mortgage. See Pledged 
Securities. 
Collateral trust indenture, 168 
Collection of coupons, discussed, 293 
Collection register, 57-58, 64, 66, 68 
Commission bill, 315 
Commission ledger, 313 
Commission. See Fees. 
Commission work sheet, 313, 314 
Committee on Stock List, rules of, 441 
Common stock certificate, 228, 231 
Compensation, 302 
Comptroller, 7 
Conditional sale plan of equipment 
trust, 165 
Consolidation, or merger, 
gagor, 158 
of trustee, 158 


of mort- 


INDEX 


Constitution of United States, Art. IV, 
Sec. 2, 23 
Contract of conditional sale, 165, 167 
Controlled companies. See Subsidiary 
Companies. 
Control sheet for unissued stock cer- 
tificates, 259 
Control system for 
Vault Control. 
Conversion of bonds, fees, 306 
Conversion privilege for unsecured is- 
sues, 169 
Conversions, 185 
Corporate agencies, fees, 308 
scope, 9 
services, scope of, 187 
Corporate blotter, 48 
Corporate Fiduciaries Association of 
New York, activities and fees, 
303 
report on lost and stolen securi- 
ties, 87 
Corporate Fiduciaries, early history, 1 
Corporate mortgage. See Mortgage. 
Corporate trust department, fees, 303, 
304, 305 
functions, 9 
records, 34 
Corporate trustees, qualifications, 19 
Corporate trusts, acceptance of, 22 
development, 2 
scope, 9 
securing business, 22 
Corporation, By-laws, 28, 233 
charter, 27, 233 
transfer of stock, 247 
Correspondent banks, payments for, 
186 
Co-transfer agencies, 251 
Counsel for Protective Committee, ad- 
visability of trustees counsel act- 
ing, 192 
Counsel’s opinion, bond issue, 96, 99 
lien of mortgage, 28, 29 
recording and filing, 29 
Counter receipt, bond 
282 
exchanges, 41 
reorganization, 220 
Transfer Department, 252, 253 
Coupon account, 
audit, 296 
collection, methods of, 293 
statement and verification, 295 


securities. See 


registrations, 


459 


Coupon, envelope for, 291 
ledger, 294 
money, return of, 301. 
Coupon paying, 287 
payments for correspondents, 296 
receipts of funds, 288 
return envelope, 292 
statement, monthly statement and re- 
ceipt, 298 
Coupon paying agent, scope, 11 
Coupon Paying Department, billing, 
316 
records of, 291 
relations with Corporate Trust De- 
partment, 288 
accounting at each maturity, 289 
Coupons, accounting for, 161 
cremation of, 162 
facsimile signature, 83 
form of, 81 
from called bonds, 298 
on interim receipts, 175 
Covenants, appraisal, 111 
balance sheet, 110 
breach of, 112 
earnings statement, 110 
equipment statement, 111 
Federal Income tax, 104 
financial statements, 110 
“formal,” 103 
insurance, 106, 108 
maintenance and renewal, 111 
mortgagor’s, 102 
net quick assets, 108, 109, 110 
railroad equipment trust, 166, 167 
reasons for, 102 
restricting bond issue, 109 
restricting dividends, 109 
sales certificate, 111 
State taxes, 104 
taxes, 104 
to be calendared, 112 
trustee’s interest in, 102 
underlying bonds, 104 
value of, 113 
Credit Department, 4 
Cremation, affidavit certificate of, 163 
of bonds, fees, 307 
of canceled stock certificates, 269 
of coupons, fees, 307 
of securities, 162 
Custody of securities, 7 
Customers’ verifications, 61, 65, 66 


460 


D 
Debentures, 17 
issues, 169 
Declaration of trust by nominee, 130 
Decree of foreclosure, 150 
Deed of trust, for foreign insurance 
companies, 180, 181, 182 
See Mortgage. 
Default, bearing on pledged securities, 
132 
events of, 143 
period of grace, 146 
procedure of trustee, 145 
Defaults and remedies. See Foreclo- 
sure. 
Defeasance, 159, 160 
Defeasance clause, 77 
Deficiency judgment, 148 
Definitions of mortgage terms, 162 
Delivery record of Reorganization De- 
partment, 224 
Denver Tramway Company case, 117 
Deposit agreement, described, 194 
expenses and compensation of com- 
mittee, 196 
form of, 423 
parties to, 195 
provisions governing 
196 
terms of, 195 
Depositary, appointment of, 10 
under escrow agreement, 183 
Depositary for Protective Committee, 
acceptance of, 196 
action regarding deposited securities, 
209 
functions prior to reorganization, 
summarized, 202, 204 
relationship with committee’s secre- 
tary, 199 
termination of duties, 211, 212 
Deposited securities, withdrawal of, 
207 
Deposit in trust, for holders of in- 
terim receipts, 89 
of cash, with sub-depositaries, 98 
of securities, time limit, 204, 205 
of temporary withdrawal ticket, 58, 
59 
Destroyed bonds, 85 
stock certificate, 268 
Destruction of canceled 
162 
Development Department, 4, 32 


withdrawal, 


securities, 


INDEX 


Directors of mortgagor, immunity of, 
164 
resolutions of authorizing mortgage, 
28 
shares, 131 
Disbursements, 
cipal, 318 
voucher, 316 
Dissents from 
206 
Distribution 
150, 151 
Distribution of new securities follow- 
ing reorganization, 210 
Dividends, check, 263 
disbursing agent of, 
263 
fees, 309 
from pledged securities, 131 
order, 261, 262 
payment of, 261 
stock, 266 
Warrants on equipment trust cer- 
tificates, 167 
Division between trusts and agencies 
discussed, 187 
Document index, 39 
executed slip, 73 
Documents supporting mortgage, 27, 
31, 52 
Dollar control for securities, 54 
Duplicate bonds, issue of, 85 
Duplicate certificates of stock, affect- 
ing registrar, 278 
affecting transfer agent, 268 


chargeable to prin- 


reorganization plan, 


after foreclosure sale, 


appointment, 


E 


Earnings statement, 
bond issue, 96 
Eminent domain, power of, 138 
Engineers, approval by trustee, 111 
Equipment trust, form of, 395 
purpose of, 165 
Escrows, 183 
Exchangeability of bonds, legend for, 
82 
Exchange of temporary bonds, 42 
of temporary securities, 307 
record title sheet, 43 
record, use of, 42 
sheet, 39, 40 
ticket, 41, 42 
Executors and transfer of stock, 248 
Expenses, reimbursement of, 318 


prerequisite to 


INDEX 


F 


Farmers’ Fire Insurance & Loan Com- 
pany, 1 
Farmers’ Loan & Trust Company, 1 
Federal Reserve Act, 3 
amendment, 3 
Supreme Court decision, 4 
Federal Revenue Act stamp taxes. 


See Tax. 
Fee records, 312 
Fees, 302 


in New York City, 311 
Fiduciaries, early history, 1, 2 
transfers of stock, 247 
Fiduciary group of trust company, 7 
Fiscal agent, appointment of, 289 
fees, 309 
for municipalities, 185 
“Follow-up” card, 70, 74 
Foreclosure, decree, 150 
procedure of trustee, 146 
purchase by reorganization commit- 
tee, 209 
sale under, 147 
trustee’s activities, 148, 149 
trustee’s computation of amount due, 
149 
Foreign comporation issues, fees, 308 
Foreign department, 6 
Foreign government issues, fees, 308 
Foreign insurance companies, fee of 
trustee, 307 
Foreign insurance trusts, 179, 180 
French bearer certificates, 179 


G 


Grace in event of default, 146 

Granting clause of mortgage, 77 

Guarantee of signatures on 
transfers, 244 

Guardians and transfer of stock, 249 


stock 


H 


History of trust sheet, 35, 39 
supplementary sheet, 36 


I 


Identification of signatures on stock 
transfers, 245 
registration for, 184 
Income Tax, Federal. See Tax. 


461 


Indemnity, Bondholders’ Committee to 
trustee, 147 
letter, covering lost dividend check, 
265 
See Bond of Indemnity. 
Indenture. See Mortgage. 
“Indeterminate” mortgage, 90 
Individuals and partnership, transfers 
of stock, 246 
Individual trustees, as co-trustees, 19, 
23 
appointment of attorney-in-fact, 157 
appointment of successor, 157 
Individual trusts, 7 
Industrial note issues, fees, 307 
Inspection of stock records, by stock- 
holders, 260 
Insurance, covenants of, 108 
deed of trust, 180, 181, 182 
policies, 108 
record, 107 
trusts of foreign companies, 178, 179 
under corporate mortgage, 106 
Interest, allowance on cash balances, 
156 
from pledged securities, 131 
loss on bonds called for redemption, 
125, 126 
payments on deposited bonds, 200 
payments on registered bonds, 84 
Interim certificates, exchange of, 89 
purpose of, 88 
receipt, form of, 173, 174 
registration of, 89 
segregation of proceeds, 89 
use of, 170 
See Interim Receipts. 
Interstate Commerce Commission, ap- 
plication to abandon mileage, 
139 
approval of bond issue, 98 
approval of stock issue, 240 
Investment of cash for mortgagor, 97 
of sinking fund, 115 
trust, 177 
Investments in United States, 3 
Issue of bonds. See Bond Issue. 


J 
Joint facilities, 11 
Joint reorganization committee, 207 
Junior security holders, treatment of in 
foreclosure, 147, 148 
on reorganization, 208 


462 


L 


Large v. small companies, comparison 
of practice, 187 

Lederer v. Fidelity Trust Co., 167 

Legend on fully registered bonds, 84 

Letter of instructions, escrow, 183 

interim receipts, 170, 171 

Liability of trustee, reasons for limita- 
tion, 153 

Liens, conflicting, 25 

Limitations on bond issues, 90 

“Limited open end” mortgage, 90 

Loan Department, 4 

Loose leaf records, advantages, 34 

Loss of securities, acknowledgment of, 
87 

Lost bonds, 85 

Lost dividend check search sheet, 264 

Lost stock certificate, 268 


M 


Mailing redemption notice, 125 
Maintenance and betterment fund, 122 
Management of trust company, 7 


Massachusetts income tax covenant, 
104 

Memoranda tickets for cash, discussed, 
66 

Merger affecting pledged securities, 
134 


of mortgagor, 158 
of trustee, 157 
Miscellaneous provisions of mortgage, 

158 

trust functions, 170 

Mortgage, acknowledgment to, 164 

bondholders and change of terms in, 
142 

counterparts, 27 

defeasance clause, 77 

defined, 12 

examination guide, 30, 31 

examination of draft, 25 

execution, 27, 164 

fees of trustee, 303 

first, 14 

first and collateral, 15 

first and refunding, 14 

form of, 333 

general, 15 

granting clause, 77 

habendum, 77 

income, 16 


INDEX 


Mortgage (continued ) ‘ 


“In trust, nevertheless,” 77 

leasehold, 15 

meaning, as used herein, 18 

parties, 75 

preamble, 75 

prior lien, 15 

purchase money, 15 

rank of, 13 

recording, 27 

recording data, 39 

refunding, 15 

release and discharge, 160 

satisfaction of, 160 

second, 14 

tax, 29 

various types, 12, 13, 14, 15, 16 
Mortgaged property, abandonment of, 

138 
Mortgagor, financial standing of, 
trustee does not warrant, 151 

merger or consolidation, 158 

rights as to redemption, 123 
Mutilated bonds, 85 


N 


Name on stock certificate, 244 
Net quick assets covenant, 158 
defined, 109, 110 
New business, department of. See De- 
velopment Department. 
Investigating proposals of corporate 
trust agencies, 23, 188 
solicitation of, 8 
New York & Erie Railroad Com- 
pany, 2 
New York Life Insurance & Trust 
Company, 1 
New York Stock Exchange listing re- 
quirements, 441 
requirements for registrar, 10 
Nominee, card, 130 
for pledged securities, 129 
Note issues, 169 
Notes. See Bonds. 


O 


Obligations. See Bonds. 
Officers, certificate of election, 28 
of mortgagor, immunity of, 164 
“Open end” mortgage, 90 
Original issues of stock, record of, 259 
Ownership of bonds, evidence of, 159 
listing and filing of, certificates, 295 


INDEX 


P 


Partial releases of property. See re- 
leases of property. 
Paying agent, for banks and trust 
companies, 186 
for bonds, 185 
of coupons, fees, 309 
registered interest, fees, 309 
Payment of bonds, mechanics of, 45 
of coupons for correspondents, 296 
of coupons. See Coupon Paying. 
on deposited bonds during reorgan- 
ization, 200 
Pending card, 70, 74 
Pennsylvania Company for Insurance 
on Lives, etc., 1 
“four mills” tax covenant, 104, 105 
Personal property taxes, refund of, 
104, 105 
trusts, 7 
Philadelphia plan equipment trust, 165 
compared with conditional sale 
agreement, 167 
form of, 395 
Plan of reorganization. See Reorgan- 
ization. 
Pledged securities, control of, 128 
disposition of income, 131 
payment on account principal, 132 
possession of, 129 
registration, 129 
relative rights of trustee and mort- 
gagor, 128, 129 
subject to other mortgages, 131 
under collateral trust, 168 
use of nominee, 129, 130 
voting rights discussed, 132, 133 
Power of substitution for transfer of 
stock, 243 
Preamble of mortgage, 75 
Preferred stock certificate, 232 
Prior mortgages, closing, 33 
trustees, notice to, 33 
Proof sheet of cash transactions, 66, 
71 
Property cards, 62 
discussed, 56, 57 
Property covered by mortgage, 77 
Protective agreement. See Deposit 
agreement. 
Protective clauses. See Trustee Clauses. 
Protective committee, final instructions 
to depositary, 212 
formation of, 190, 191 


463 


Protective Committee (continued) 
form of deposit agreement, 323 
form of notice to bondholders, 192, 


193 

loans against deposited securities, 
200 

represents one class of securities, 
190 


secretary’s duties, 191 
trustee’s relations with, 191 
Proxies for pledged stock, 133 
Publication of redemption notice, 125 
by protective committee, 192, 198, 
199, 206 
Public bodies, approval of bond issue, 
98, 100 
Service Commission and approval 
of mortgage, 28 
Purchase of bonds, fees, 306 
certificate for stock, 217, 218 
for sinking fund, 116, 118 


Q 
Qualifying shares, 131 


R 


Readjustment and reorganization, com- 
pared, 213, 214 
defined, 189, 213 
maintenance of original position by 
securityholder, 214 
Receivership, bearing on release of 
property, 140 
Recitals of mortgage, 75 
Reconcilement sheet of Corporate 
Trust Department, 66, 71 
Record of bonds issued, 37 
Record of depositors, 222 
Record of original issues, by transfer 
agent, 257 
stock registrar, 277 
Record of trusts, 36 
Redeemed bond notice, Coupon De- 
partment, 299 
Redemption of bonds, affidavit as to 
mailing notice, 125 
afhdavits as to publication, 125 
fees, 306 
form of notice, 124 
for sinking fund, 120 
interest loss through non-collecticn, 
125, 126 
large drawing discussed, 123 
rights of bondholder, 123 
rights of mortgagor, 123 


464 


Redemption records, 44, 45, 69 
Refunding of underlying bonds, 92, 93 


Refund of personal property taxes, 
105, 106 
fees, 307 


Registered interest, payment of, 284 
record of, 287 

Registrar, appointment of, 10, 273 
for identification, 184 
of bonds, fees, 309 
of stock, 272 
records of, 275 
relations with transfer agent, 274 


scope, 10 
Registration of bonds as to principal, 
25-8); 
department billing, 316 
fees, 309 


full registration, 280 
mechanics of, 83, 84 
of principal, form for, 82 
records of, 284 
Release of mortgage, 160 
Release of property, 134 
application of proceeds, 139 
deferred payments, 138 
documents required, 137 
during receivership, 140 
fees, 307 
form of application, 136 
restrictions imposed, 135 
substitution of property, 137 
underlying lien, 139 
Remedies. See Foreclosure. 
Rentals, under “Philadelphia Plan,” 
167 
Reorganization, affecting pledged se- 
curities, 134 
committee, joint, 207 
consummation of, 209 
counter ticket, 220, 221, 226 
defined, 188, 189 
department, relations with trustee, 
189, 190 
distribution of securities, 210 
fees, 310 
initial steps, 190 
organization of new company, 210 
plan and agreement, discussed, 211 
plan, as to dissenting depositors, 
206 
presentation of, 206 
records, 220-226 
scope of activities, 10, 188 


INDEX 


Reorganization (continued) 
time limit for payment of assess- 
ments, 211 
Research sheet for bond issues, 99, 100 
use of, 90 
Restrictions on bond issue, 94 
Return of coupon money, 301 
Return to Collector of Internal Rev- 
enue, covering interest paid, 289, 
290 
fees, 309 
“Rights” to subscribe to stock, 215 
Russian Reinsurance Company v. Stod- 
dard, 183 


S 


Sale under foreclosure, 147 
of mortgaged property. See Release 
of Property. 
Satisfaction guide, 160, 161 
fees of mortgage, 307 
scrip, use of, 268 
Securities blotters, discussed, 60, 61 
held by American public, 3 
ledger, 46, 47 
transactions, 47 
Security-holders. See Stockholders or 
Bondholders. 
Signatures, on bonds, 83 
on stock certificates, 233 
Sinking Fund, acceptance of tenders, 
119 
acquisition of bonds, 116 
application of, 118 
applied to various series, 121 
bases for, 115 
bonds in lieu of cash, 120, 121 
comparison of prices, 119 
disposition of bonds acquired, 120 
investment of, 115 
inviting tenders, 118 
measure of payment, 117 
notice, 118, 119 
operation of, 115 
payment of accrucd interest, 120 
payment of expenses, 120 
redemption of bonds, 120 
rejection of tenders, 119 
relative to type of business, 114 
tender by mortgagor, 120 
to amortize debt, 114 
withdrawal for capital expenditures, 
121,,122 
Specimen bond, 29 


INDEX 


Split ticket, 55, 61 
Stamping of bonds after sale under 
foreclosure, 147, 150 
Stamp taxes. See Tax. 
Standardization of fees, 303 
Statement and receipt of Coupon De- 
partment, 298 
State statutes, California, 24 
Indiana, 24 
Missouri, 24 
restrictive as to foreign trustees, 24 
Statistical Department, 6 
Statute of Limitations regarding en- 
dorsement of stock, 269 
Stencils, 57, 63, 65, 261 
Stock, assignments of, 243 
classifications of, 227 
original issues of, 239 


Stock certificates, 227, 232 
forgery of endorsement, 269 
issued sheet, 317 
signatures on, 233 


Stock dividends, 266 
record, 267 


Stockholders, certificate of consent to 
mortgage, 28 

list, 261 
meetings, 260, 261 
of mortgagor, immunity of, 164 
reluctance to deposit, 197 
resolutions authorizing mortgage, 28 
right to inspect records, 260 


Stock Registrar. See Registrar. 
Stock Transfer. See Transfer of 
stock. 
Stolen bonds, 85 
stock certificate, 268 
Stop payments, against bonds, 86 
against coupons, 300 
Stop transfers, affecting registrar, 278 
affecting transfer agent, 270 
Sub-depositaries, reorganization of, 
196 
Subscription record, 225 
Subscription to securities, 
215216217 
without issue of rights, 219 
Subsidiary companies, pledged stock of, 
133 
Substitution of collateral under col- 
lateral trust, 169 
power of, 243 
Successor trustee, 157 
Summary sheet for bond issues, 38 


warrant, 


465 
Supplemental indentures, fees, 307 
purposes of, 141, 142 
Supporting documents. See Documents. 
Supreme Court, Federal Reserve Act 
decision, 4 

Surety bond. See Bond of Indemnity. 
Switzerland General Insurance Co. v. 
New York Central, 87 


“Symbols” for collection register, 58, 
59 


2% 


Tax deduction ticket of Coupon De- 
partment, 294 
Taxes, estate and inheritance, 251 
“Tax-free covenant” bonds, 104, 289 
‘Tax, in various states, 250 
legend on bonds, 99 
on bond issue, 99 
on original issues of stock, 240 
on stock transfers, Federal, 250 
Tax returns by Coupon Paying De- 
partment, 290 
Tellers, 4 
Temporary bonds, deposit tickets, 54 
exchange of, 89 
form of, 88 
interest stamp, 99, 100 
Temporary deposit ticket, receipt of 
Reorganization Department, 221 
securities, 54, 55 
withdrawal ticket of securities, 54, 
5Opt5 7, 
Tenants as to stock transfers, common, 
246 
joint, 246 
Tenders of bonds, acceptance or rejec- 
tion, 119 
for sinking fund, 118 
Tickler card, 70, 73 
Transfer agent, stock, 
of, 10, 233 
billing, 316 
papers for appointment, 233 
records, 252 
resolution appointing, 234, 326 
scope of, 10 
Transfer agent of bonds. 
tration of bonds, 
Registrar. 
Transfers of stock, classification, 246 
closing of books, 260 
corporations, 247 
fiduciaries, 247, 248 
individuals, 246 


appointment 


See Regis- 
and Bond 


466 


Transfer of Stocks (continued) 
‘methods of, 255 
partnerships, 246 
“powers,” 242 
records, 252 
requirements, estate transfers, 248 
tenants, 246 
trustees, 249 
Trial balance for stock ledger, 257 
Trust checks, 68, 72 
Trust companies, development of, 2, 3 
early history, 1 
executives, 7 
organization, 4 
organization chart, 5 
reference includes other financial in- 
stitutions, 3 
supervision in New York, 2 
Trustee, and payment of interest, 156 
certificate, 81 
certificate to identify bond, 83 
clauses, 152 
corporate, 23 
customary provisions, 154, 155 
examination of mortgage, 32 
individual, 19, 23, 157 
liability of, 152 
may rely on officers’ certificate, 156 
merger of, 157 
purpose of, 153 
qualification in states, 23 
removal of, 156, 157 
representation on Protective Com- 
mittee, 191 
resignation of, 156, 157 
responsibilities, 20, 90 
scope of duties, 19, 20, 99 


INDEX 


Trusteeships, investigation of, 23 
Trust indenture. See Mortgage. 
Trust Investment Committee, 8 


U 


Underlying bonds, canceled, 93 
lien, as to release of property, 139 
mortgage, satisfaction, 93 
stamping, 93 . 


Underwriting of bond issue, 22 


reorganization, 208 
Unissued certificates, control sheet, 259 
Unit control for securities, 50 
Unsecured issues, 169 
U. S. Constitution, Art. IV, Sec. 2, 23 


Vv 


Vault control, 50, 51, 52, 53 
delivery ticket, 52, 53 
deposit ticket, 50, 51 
index card, 74 
marker, Reorganization Department, 
223 . 
tickets, use of, 56 
Voluntary readjustment, 213 
Voting dividends on, 241 
Voting pledged stock, 132 
Voting registration of, 277 
Voting transfer agent for, 240 
Voting trust certificate, 241 
Voting trustees, relations with, 241 


WwW 
Warrants to subscribe to stock, 215, 
216, 217 
Withdrawal of deposited securities, 
207 


oo | a 


r 
aah 


) fiat 
Beit is. 


3 


ii 


URBANA 


3 0112 057576404 


Ci] 
(e) 
2 
all 
a 
rs 
fe) 
a 
= 
= 
;z 
5 


